NEW YORK--()--Fitch Ratings affirms its 'C' rating on the following Troy Downtown Development Authority, Michigan's (the authority) tax increment bonds (TIBs):
--$10.5 million outstanding development and refunding bonds, series 2001;
--$2.6 million outstanding community center facilities junior lien bonds, series 2003.
The rating on the series 2001 bonds does not consider the benefit of bond insurance, which is provided by National Public Finance Guarantee.
The series 2001 bonds are secured solely by a first lien on incremental ad valorem taxes generated within the authority's boundaries. Payment of the series 2003 junior lien bonds is subordinate to the payment of the series 2001 senior lien bonds.
KEY RATING DRIVERS
ONGOING TAX BASE EROSION: Taxable values continue to fall, declining by 8.2% in fiscal 2013 (beginning July 1). Over the past four years the tax base has lost nearly one third of its value while the highly leveraged tax increment plummeted by 87%.
REVENUES FAIL TO COVER DEBT SERVICE: In recent years, tax increment revenues have fallen increasingly short of annual debt service costs, requiring extensive use of operating reserves to close the gaps. The authority projects that the debt service reserve fund (DSRF) will be tapped in 2013 with the May interest payment date absent city intervention. Fitch's cash flow projections concur with this scenario.
NEGATIVE PROSPECTS FOR ANY NEAR-TERM RECOVERY: The relative maturity of the redevelopment area, the glut of available office space and statewide restrictions on assessed value growth make it highly unlikely that a meaningful recovery in the authority's tax base will occur in the foreseeable future.
VERY HIGH COMMERCIAL VACANCY RATES: The redevelopment area represents the city's commercial and retail core, but vacancy rates among the large number of office and commercial properties remain high.
WHAT COULD TRIGGER A RATING ACTION
CITY ACTION REQUIRED TO PREVENT DEFAULT: A bond default will occur unless the city acts beyond its legal obligation and provides substantial financial assistance.
TAXABLE VALUES CONTINUE TO SLIDE
The authority's tax base continues to shrink with a reported 8.2% drop for fiscal 2013, the fourth consecutive yearly decline. Since fiscal 2009, taxable values within the redevelopment area have fallen by nearly one third while the tax increment, burdened by relatively high base year values, lost a precipitous 87% of its value. The fiscal 2013 taxable value reduction was less than the city assessor's projected 12% to 14% drop. However, this was due to unexpected favorable court decisions on property tax appeals rather than any significant movement in the local real estate market. Projections for assessed valuation for the development area and the county suggest continued negative adjustments.
FALLING REVENUES DRAIN RESERVES
As increment values have withered, tax increment revenues generated within the redevelopment area are falling well short of covering annual debt service. Fiscal 2013 tax increment revenues total $500,000 or only 14% of the annual debt service requirement. By the end of fiscal 2013, the authority projects conservatively and Fitch cash flow projections concur that it will have used all of its remaining operating reserves to plug the revenue gap and will tap its debt service reserve. Positive variation in operations may push this scenario out to the November 2013 principal and interest payment. The $3.2 million reserve fund provides about one additional year of coverage with the assumption that the trustee will release substantially all of the funds for the benefit of bondholders.
BONDS POISED TO DEFAULT WITHOUT EXTERNAL SUPPORT
The city property assessor projects much smaller declines in taxable values over the next four years, ranging from 2% to 4% annually. The redevelopment area's largely commercial properties have been devastated by the sharp downturn in office and commercial real estate. However, as the tax increment currently yields negligible increment revenues, the magnitude of further losses will have no appreciable effect upon the authority's timetable for expected default. The projected valuation decreases in fiscals 2014 and 2015 would reduce the redevelopment area's tax base to base year levels, completely wiping out the tax base increment.
Any near-term recovery of the tax base is unlikely given the depths of the real estate downturn, the overcapacity of the city's office market, and state constitutional limitations on year to year assessment growth. Fitch believes that, absent forceful city intervention, the bonds will default within the next two years.
NO LEGAL OBLIGATION FOR THE CITY TO PROVIDE FINANCIAL ASSISTANCE
The city is not legally obligated to provide support to the bonds. The city has few viable options available to address the authority's predicament outside of direct financial intervention. These include refunding the tax increment bonds with city general obligation debt and providing direct financial assistance to the authority.
The issuance of general obligation debt by the city of Troy to refund the authority debt would eliminate default concerns, but may require voter authorization. The city, with city council approval, also has the option to levy a two mill property tax within the redevelopment area to support authority operations. However, the two mill levy would raise less than $1 million at projected assessed valuations, which when combined with the tax increment, would still be woefully inadequate to cover the approximate $3.4 million of annual debt service requirements. In fact, the additional revenues would not slow the pace of reserve drawdowns or buy additional time for conditions to improve. Managerial turnover at the city has delayed the city's decision on a course of action for several months.
REDEVELOPMENT AREA INCLUDES EXTENSIVE RETAIL & OFFICE PROPERTIES
Troy (LTGO rated 'AA+'; Outlook Stable by Fitch) is an affluent bedroom community in Oakland County located 14 miles north of downtown Detroit. The redevelopment area encompasses 772 acres and includes the retail and commercial core of the city. In addition to the presence of an upscale regional mall, the area contains an extensive number of office and commercial properties, including several corporate headquarters. The tax base is concentrated, typical of tax increment bonds, with the top ten taxpayers representing 45% of taxable values. Only three authority bond issues remain outstanding, including one junior lien and two senior lien bond issues; all are scheduled to mature by November 2018.
RECENT JOBS GROWTH MAY PORTEND ECONOMIC STABILIZATION
The city's above average wealth is indicated by city per capita income levels which are 163% and 151% above the state and national averages, respectively. Unemployment rates hovered around 11% in 2009 and 2010 but dropped considerably in 2011 to under 9%. February 2012 unemployment rates fell to 8.3%, in line with the state average (8.2%) and below the state and national 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, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, National Association of Realtors.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria