NEW YORK--()--Fitch Ratings takes the following rating action on Allegheny County Redevelopment Authority, PA's (the authority) tax increment revenue bonds:
--$7.3 million outstanding tax increment financing district revenue bonds (Robinson Mall project), series 2000A, rated 'BB+', placed on Rating Watch Negative;
--$2.3 million outstanding tax increment financing district revenue bonds (Robinson Mall project), series 2000B, rated 'CCC', placed on Rating Watch Negative.
The 2000A bonds are secured by the tax increment revenue derived from the mall properties, excluding the two parcels owned by Sears and J.C. Penney. As additional security, the mall owner has entered into a minimum payment agreement (MPA) pursuant to which it has agreed to make annual payments to the trustee in amounts needed to correct any debt service deficiency. The 2000A bonds are additionally secured by a standard cash-funded debt service reserve fund.
The 2000B bonds are secured by tax increment revenue generated on the Sears and J.C. Penney properties and a junior lien on tax increment revenue from the mall properties. Additionally, Sears and J.C. Penney have each entered into a MPA securing their respective pro rata share of debt service on the 2000B bonds in the event that pledged tax increment revenue is insufficient. The annual payments are capped at $233,475 for Sears and $235,920 for J.C. Penney, which would cover about one-half a year's debt service payments.
KEY RATING DRIVERS
REASSESSMENT THREATENS INCREMENTAL REVENUE: The Rating Watch primarily considers a countywide property reassessment that is scheduled to take effect in calendar 2013 and which appears likely to increase valuations significantly and lower tax rates commensurately. Sizable tax rate drops by the county, Robinson Township (the township), and Montour School District (the school district) would result in pledged revenue declines to levels well below sum-sufficient debt service coverage.
AGREEMENTS IN FLUX: An agreement among the authority and the taxing entities indicates a commitment to insuring that sufficient pledged revenue will be available to fund debt service payments. Absent a clear indication of how this will be implemented in light of the reassessment, Fitch believes debt service payments could remain at risk. Management has also indicated that the MPAs may be amended but no detail is available.
DOWNWARD ASSESSMENT OF MALL VALUES: Uncertainty remains related to the 2010 downward reassessment of mall property values by the county due to appeals.
CHANGE IN SEARS IDR: The 'CCC' rating on the series 2000B bonds is based on the current Issuer Default Rating (IDR) and Outlook for Sears. If capped required payments under the minimum payment agreements for Sears and J.C. Penney's were to be insufficient to fully compensate for a shortfall in TIF revenue, the rating would no longer be tied to either company's IDR.
HIGH TAXPAYER CONCENTRATION: Pledged tax increment revenues are generated from a relatively small but fully developed project area dominated by retail tenants highly exposed to general economic conditions and consumer spending patterns.
AVAILABLE BALANCES SUPPORT DEBT: The indenture creates a closed flow of funds; surplus tax increment revenues remain in reserve to support series A debt service shortfalls. A fully cash-funded debt service reserve for series A bonds is also available.
SOLID SOCIOECONOMIC INDICATORS: The economic characteristics of the immediate retail service area are solid.
WHAT COULD TRIGGER A RATING ACTION
REDUCED PLEDGED REVENUE FOR SERIES A: If the countywide reassessment results in significant tax rate declines with no offsetting action to strengthen pledged revenue, coverage on series A bonds would likely drop to a level no longer consistent with the current rating.
MINIMUM PAYMENT SHORTFALL FOR SERIES B: If the minimum payment required under the minimum payment agreements related to the series B bonds are insufficient to offset a shortfall in TIF revenue, the rating on those bonds would drop.
DECLINE IN MALL VALUE: Even if bondholders are protected from tax rate reductions, Fitch will consider negative rating action for series A bonds if the final outcome of the county's reassessment of the mall value and potential tax rebates results in insufficient tax increment revenues to service debt.
CHANGE IN IDR OF SEARS OR JC PENNEY: A rating on either company below Sears' current 'CCC', Rating Outlook Negative, would likely result in a downgrade of the series A bonds.
The Mall at Robinson opened in fall 2001 in Robinson Township, along a corridor connecting the Pittsburgh International Airport and the downtown business district. The mall has direct interstate access, which helps attract shoppers from a wider trade area than the immediate region.
WEAK HISTORICAL COVERAGE BUT SOLID RESERVES
Pledged tax increment revenues received in 2011, the most recent year reported, provided maximum annual debt service coverage of 0.99x (debt service is essentially level) on the 2000A bonds. The drop in coverage from 1.08x in 2010 reflects taxpayer payment on the reduced property value of $93.5 million following an appeal that lowered the value from $104.7 million.
The reduction has been appealed by the township and school district. If the assessed value is finalized at $93.5 million there is the potential that the property owner will be owed $265,976 in excess 2010 taxes (compared to $1.5 million paid in 2011). It is unclear whether or on what schedule the authority would be obligated to refund the taxing jurisdictions.
Somewhat offsetting concerns about low coverage levels are the sizable reserves available to repay series A bonds. In addition to a cash-funded debt service reserve required to be maintained at $1.35 million, the current balance in the series A TIF account is $1.2 million. Together these balances represent 1.7x debt service.
COUNTYWIDE REASSESSMENT A THREAT TO PLEDGED REVENUE
The county appears to be nearing the end of a reassessment process that, according to publicly-available information from the county, will result in a 35% increase in countywide assessed value. The township and school district can each expect a 28% jump. Given the state of Pennsylvania's Act 146 of 1998 (the 'anti-windfall law'), the county, township, and school district tax rates will likely have to reduce tax rates accordingly.
The cooperation agreement among the authority, county, township, and school district requires the tax rate applied to the mall's value to be the lower of the original (2001) rate or the current rate. Therefore a significant decline in tax rates would likely result in a similar reduction in TIF revenue.
However, the cooperation agreement also indicates a commitment by the parties to insure that sufficient TIF revenue is available for debt service following a reassessment or change in assessment system. It is unclear whether and how the parties will implement this aspect of the agreement. Once the impact of the reassessment on pledged revenue is resolved, Fitch expects to be able to address the Rating Watch.
HIGH TAXPAYER CONCENTRATION; MPAS PROVIDE LIMITED VALUE
Robinson Mall-JCP Associates is responsible for three-quarters of the tax increment revenues. These rely primarily upon lease rental payments from the mall tenants to make tax payments that constitute pledged revenue for the series A bonds (net of taxes on the minimal base year value). The mall owner's MPA provides no enhancement to Fitch's rating because Fitch does not rate the mall owner, the payment is only up to 15% of debt service, and the MPA was violated when the mall owner appealed its assessment.
Series B bonds are dependent entirely on tax payments from the Sears and J.C. Penney properties and contributions under each company's MPA. Both companies have been called upon to make payments under their MPAs, as tax increment revenue is often insufficient for debt service. For example, in 2011 combined tax increment from both companies provided coverage of just 0.54x on series B bonds.
Sears made payments under the MPA for 2007-2010 on a delayed basis and is now late in its 2011 payment on $32,320 (compared to a payment for that year under the MPA of $233,475). J.C. Penney has been making payments which it believes comply with its MPA, but the authority believes the company owes an accumulated $14,669 (compared to a minimum annual payment under the agreement of $235,920). Payments from the companies, along with available balances generated in earlier years and excess series A TIF revenue, have so far been sufficient to pay debt service but may not in the future.
CROSS DEFAULT RISK
Under the indenture, in the event of a default on either series the trustee or 25% of bondholders may declare all bonds to be due and payable immediately. Fitch does not believe an acceleration is probable as sufficient funds to redeem bonds is not likely to be immediately available. If Fitch had an indication that this acceleration option was to be invoked, the other series would be downgraded.
REGIONAL MALL WITH SOUND SERVICE AREA CHARACTERISTICS
Allegheny County, Montour School District, and the Township of Robinson adopted a tax increment financing plan to provide funding through the issuance of tax increment bonds for the construction of roadways, utility and infrastructure improvements benefiting the mall. The county has had stable to slightly declining population, generally above-average income and educational attainment, and below-average unemployment relative to the state and nation.
The mall's anchor tenants are Macy's (which is not included in the TIF), J.C. Penney, Sears and Dick's Sporting (whose taxes only to the county are included in the TIF). The mall also houses approximately 120 'in-line' retailers and eateries under long-term triple-net leases that generally extend from five to 10 years. The authority reports there are no additional capital needs at the mall that would require immediate debt financing.
In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope.
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.
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