NEW YORK--()--Fitch Ratings has downgraded and removed from Rating Watch Negative the following tax allocation bonds (TABs) for Rocklin Redevelopment Agency, CA (the RDA):
--$27.9 million TABs, series 2002B, 2005, and 2007, to 'BBB+' from 'A'.
The Rating Outlook is Negative.
The TABs are secured by a senior lien on the RDA's tax increment within the sole project area, net of the 20% low-moderate housing set-aside, and pass-through payments to various entities.
KEY RATING DRIVERS
DECLINING DEBT SERVICE COVERAGE: The downgrade is based on lower coverage levels. Driven by assessed value (AV) declines, annual debt service coverage for the RDA's non-housing TABs has fallen over the past three years to 1.58 times (x) in fiscal 2011 from 1.87x in 2009. Given AV declines for 2012, coverage is expected to fall to 1.43x in 2012. Coverage of maximum annual debt service (MADS) is forecasted to remain around 1.40x. However, continuing AV declines are a concern.
DECLINING TAX BASE MAY STABILIZE: Project area property reassessment and successful appeals led to significant AV declines of 12% in both 2011 and 2012. Officials expect the tax base, $636 million AV for 2012, to experience some further AV reductions over the next two years offset by modest new development. The largely residential (57%) and commercial (22%) tax base has a low incremental value (IV) to base year AV ratio in fiscal 2012 at 2.0x.
PROGESS ON AB1X26 IMPLEMENTATION: The City of Rocklin (the city) has been recognized as a successor agency (SA) to the RDA and has demonstrated progress in implementing AB 1X26. A recognized obligation payment schedule (ROPS), which includes 2012 debt service on the bonds, has been approved by the county and the state.
IMPLICATIONS OF AB 1484: The governor signed this trailer bill on June 27, 2012. The bill includes what Fitch believes are improvements to the ROPs approval process and other procedures going forward. However, it required repayment by many SAs of property tax distributions from December 2011 and January 2012 that should have been directed to other taxing entities. The SA represents did not owe a repayment to the county auditor-comptroller.
HOUSING-RELATED LOAN UNCERTAINTY: The SA has received sufficient payments to cover debt service on the series 2002, 2005 and 2007 TABs. However, funds are insufficient to repay an approximate $3.5 million bank line of credit (LOC), secured by housing set-aside funds and assets, which is currently due and payable. The LOC is not rated by Fitch. Under the revised legislation, the bank LOC is expected to remain subordinate in payment priority to the Fitch-rated TABs. The SA has submitted an application for insufficient funds and is working with Placer County officials to repay the line of credit. This will likely be accomplished through a note issued by the SA, purchased by the county and repaid from subordinate tax increment revenues. Uncertainties with respect to timing and execution exist although Fitch does not expect any negative impact from the housing-related bank LOC on the Fitch-rated non-housing TABs.
CONCENTRATED PROJECT AREA: Located in the downtown of Rocklin, the project area is large at over 1,600 acres (17%) of the city tax base. However, it is concentrated among the top ten taxpayers at 31% of IV in 2012. SierraPine's wood composite manufacturing facility at 5.7% is the leading taxpayer complemented by other commercial and industrial properties.
STABLE LOCAL ECONOMY: Despite local AV declines and slower growth, the city economy continues to perform better than the greater Placer County and Sacramento economies, with below average unemployment rates and comparable income levels.
WHAT COULD TRIGGER A RATING ACTION
COVERAGE EROSION: Further erosion of debt service coverage due to continuing AV declines will likely lead to another rating downgrade.
The SA has received ROPS approval for the January-June 2012 and July-December 2012 periods. The RDA received sufficient funds from Placer County in 2012 to fund non-housing TAB debt service payments for March and September 2012. As noted above, overall funds received were not sufficient to repay the currently due housing-related $3.5 million outstanding bank LOC. The SA is also in the process of arranging a loan to make the payment. Annual non-housing TAB debt service averages $1.8 million through final maturity in 2037. The non-housing TABs benefit from a cash-funded debt service reserve of approximately $1.8 million. The RDA has no outstanding housing TABs, only the bank LOC.
CONCENTRATED PROJECT AREA
The Rocklin Redevelopment project area was formed in 1986. The project area encompasses over 1,600 acres of commercial, industrial and housing properties in the downtown area and an area adjacent to Interstate 80, the major west-east interstate in northern CA. Multiple development projects led to significant AV increases between 200 and 2009. However, successful valuation appeals and property reassessment led to significant declines of 12% annually in both fiscal 2011 and 2012. Modest new development including a new WalMart store is expected by city management to stabilize the tax base over the next few years. The top ten taxpayers comprise a high 31% of the project area's total IV in 2011 led by Sierra Pine at 5.7%.
REDUCED COVERAGE RATIOS
Significant AV losses in 2010 and 2011 totaling 12% have reduced annual debt service coverage to 1.58x in 2011 from 1.87x in 2009. Coverage is expected to decline to 1.43x in 2012. AV declines are projected to slow to 3.5% in 2013 and remain vulnerable to further declines given outstanding appeals and modest levels of new development.
SLOW BUT STABLE LOCAL ECONOMY
The City of Rocklin is located in Placer County, approximately 20 miles northeast of Sacramento. Strong growth over the past decade was driven by the area's relative affordability and proximity to Sacramento's greater employment base. It should be noted, though, that growth has slowed in the past three years. Despite the slowdown and AV declines, the local economy continues to maintain below average unemployment, 7% in May 2012 compared to Sacramento at 12.3%. Additionally, the city income levels are comparable to the county and regional averages.
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.
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
U.S. Local Government Tax-Supported Rating Criteria