NEW YORK--()--Fitch Ratings has assigned a rating of 'A-' to the following bonds of Orlando, Florida's community redevelopment agency (CRA or the agency):
--$28.4 million tax increment revenue refunding bonds (Republic Drive/Universal Boulevard District), series 2012.
The bonds are expected to sell the week of Jan. 23rd via negotiation. The bonds will redeem some or all of the agency's outstanding tax increment revenue refunding bonds (Republic Drive/Universal Boulevard District), series 2002.
The Rating Outlook is Stable.
SECURITY
Pledged revenues consist principally of tax increment revenue generated from the redevelopment area, once deposited by the agency into the revenue account held by the trustee.
Bondholders are additionally secured by a cash funded debt service reserve account equal to the lesser of maximum annual debt service (MADS), 10% of par, or 1.25 times (x) average annual debt service.
KEY RATING DRIVERS
UNIVERSAL ORLANDO EXPOSURE: Nearly all of the well-established area consists of entertainment and related venues affiliated with Universal Orlando Studios. The strength of Universal Studios as a brand and of the surrounding region as one of the country's premier tourist destinations helps mitigate concerns about the high level of exposure to a single property owner.
SOLID DEBT SERVICE COVERAGE: Debt service coverage of MADS has been sound at 2.07x or better since fiscal 2003 and is projected at 2.4x in fiscal 2012.
GOOD STRESS TEST PERFORMANCE: The redevelopment area assessed value (AV) can experience a decline of about 40% before tax increment revenue would fail to cover MADS.
SOUND LEGAL PROVISIONS: An additional bonds test will require historical coverage equal to 2x MADS.
NO COLLECTION RISK: The taxing authorities are required to appropriate 95% of the incremental tax levy, regardless of actual collections.
TAX BASE VOLATILITY: The high ratio of incremental value to total AV serves to reduce revenue volatility related to changes in AV. However, tourism related activity tends to exhibit cyclicality linked to macro economic conditions, which can negatively impact property values as was the case in fiscal years 2010-2011.
WHAT COULD TRIGGER A RATING CHANGE
CREDIT QUALITY OF UNIVERSAL ORLANDO: Substantial changes in the credit quality of Universal City Development Partners, Ltd.
DECLINES IN PLEDGED REVENUES: Notable deterioration in pledged revenues and debt service coverage.
CREDIT PROFILE
UNIVERSAL ORLANDO CONCENTRATION
The Republic Drive/Universal Boulevard District was formed in 1994 and encompasses 780 acres in Orlando, Florida (implied general obligations rated 'AAA' Stable Outlook by Fitch). Universal City Development Partners, Ltd. (Universal Orlando; IDR 'BBB' Stable Outlook) is the corporate owner of 680 acres of property within the redevelopment area, with AV that exceeds the project area's incremental value. Universal Studios properties include the Universal Studios Theme Park, the Islands of Adventure Theme Park, City Walk, and auxiliary components such as the Hard Rock and Portofino Bay hotels, parking garages, and restaurants. Commercial developments in the area are limited and consist primarily of back-office functions for the theme park, and residential use represents less than 6% of TAV.
Fitch considers the concentration to Universal Orlando to be exceedingly high even for a redevelopment district. Somewhat mitigating this credit concern is the long-standing success of the Universal properties, the company's globally recognized brand, the relatively high barriers to entry into the U.S. theme and amusement park industry, and the benefits derived from Orlando's standing as a premier tourist destination.
Universal Orlando is a wholly owned subsidiary of NBC Universal Media, LLC (IDR 'BBB' Outlook Stable), which fully and unconditionally guarantees Universal Orlando's senior and senior subordinated notes. Fitch believes that this guarantee, the importance of Universal Orlando to the NBC Universal Media brand, and existing licensing agreements lessen the prospects of a contraction of the theme park.
Fitch's analysis also considers strong property tax collection process in Florida. The taxing authority's ability to collect property taxes is enforceable through a tax lien sale and, ultimately, property foreclosure, which Fitch views as a strong enforcement mechanism.
STEADY COVERAGE RATIOS AND TAX BASE GROWTH.
The CRA has demonstrated steady coverage ratios of at least 2.1x MADS since fiscal 2006 and fiscal 2012 coverage is projected at 2.4x. Debt service will decrease as a result of the refunding and will be level. Baseline assumptions of a 2% decline in AV for fiscal 2013 followed by no growth in fiscal 2014 and subsequent annual 2% growth yield coverage of at least 2.4x though the life of the bonds (final maturity is in 2025). Fitch stress tests indicate that the loss of about 40% of the redevelopment area's total AV would still result in coverage of 1.0x MADS.
The loss of payments by Universal Orlando and affiliated properties would result in revenues collections significantly below debt service requirements. Fitch takes comfort that the taxing authorities are required to deposit in the trust fund an amount equal to 95% of the incremental levy, regardless of actual collections.
Close to $700 million in TAV was added between the base year (calendar year [CY] 1994) and CY2002, with a subsequent slowing of tax base growth. Although there have been some tax base declines, the incremental value (IV) to base year AV ratio is still solid at 2.6x. The tax base has proven resilient over the past few years, with relatively manageable downward trending during the economic slow down. Since fiscal 2003 the redevelopment area has incurred AV declines of 2.9% in fiscal 2005, 9.1% in fiscal 2010, and 7.2% in fiscal 2011. Taxable values improved by 7.4% in fiscal 2012, reflecting Universal's investment in and the opening of its Harry Potter attraction. City officials anticipate that the popular exhibit will help grow incremental values in the upcoming year.
SOLID LEGAL PROVISIONS
Tax increment revenues are levied and collected by the City of Orlando (the city) and Orange County (the county), as the sole taxing authorities within the redevelopment area. On or before each Jan. 1 the taxing authorities are required to deposit in the redevelopment trust fund, which is held by the city on behalf of the agency, an amount equal to 95% of the difference between the amount of ad valorem taxes levied in such fiscal year on taxable property within the redevelopment area, regardless of the actual collection rate, and the amount that would have been generated by applying the then current millage rate to the base year AV. The statutory obligation of the taxing authorities to make the required payments to the trust fund continues for as long as the agency has outstanding debt securitized by increment revenues.
The additional bonds test will state that the prior fiscal year's pledged revenues must equal at least 2x maximum annual debt service. Pledged revenues flow first to the authority for debt service and certain incidental costs, with residual revenues transferred to the taxing authorities to be used for any purposes.
CENTRAL FLORIDA ECONOMIC STRENGTHS
The Orlando metropolitan statistical area (MSA) employment base is dominated by the leisure and hospitality sector, which accounts for 20% of all jobs (approximately two times the national average). Disney is the dominant player, employing more than 62,000 or 5.5% of the MSA's labor force. Universal employs 13,000. The tourism sector is rebounding well, aided by the June 2010 opening of the Harry Potter attraction at Universal, which has softened additional declines in construction and financial activities. Orange County's November 2011 9.6% unemployment rate is a marked improvement over the 11.9% of a year ago, due to an annual 1.3% employment gain and a 1.2% decline in the labor force, although the unemployment rate still remains below the nation's 8.2%.
Economic diversification continues to take hold, most notably within the education and health services sectors. A growing biotechnology and life sciences cluster is anchored by The University of Central Florida's (UCF) Health Sciences Campus, which is home to its College of Medicine and the Burnett College of Biomedical Sciences, in addition to M.D. Anderson Cancer Center and Sanford-Burnham Medical Research Institute. In addition, opening in 2012 will be the Nemours Children's Hospital and a new Veteran's Administration hospital. Arden, Laffer & Moore Econometrics estimates the creation of 30,000 jobs and $2.8 billion in annual wages by 2017 as a result of activity at the UCF campus and the life sciences cluster.
Global Insight and Property and Portfolio Research forecast strong job growth in 2012 through 2016 of 2.8% and 3.1% respectively, on an average annual basis. Unemployment is expected to remain elevated relative to the nation due to anticipated population gains. Over the long term Fitch expects that Orlando's economy will continue to grow and attract a wide variety of residents and businesses.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings
In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, Zillow.com, National Association of Realtors, Bond Counsel, and Disclosure Counsel.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 15, 2011);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 15, 2011).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648898
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648842
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