NEW YORK--()--Fitch Ratings assigns the an 'A' rating to the following North Sumter County Utility Dependent District (NSCUDD) revenue bonds:
--$50,980,000 solid waste revenue bonds, series 2012;
--$1,960,000 subordinate solid waste revenue bonds, series 2012.
The bonds are scheduled for negotiated sale on Dec. 19. Proceeds will pay the cost of acquiring an existing solid waste collection and disposal system. The bonds have a final maturity date of Oct. 1, 2042.
Proceeds will also fund a deposit to the reserve account for the senior and subordinate bonds, fund a deposit to the operating account (equal to one month of system operating expenses), and pay cost of issuance.
The Rating Outlook is Stable.
The bonds are secured by a pledge of and lien upon all rates, fees, charges and other income from ownership and operation of the solid waste system net of operating expenses. The bonds are additionally secured by a reserve equal to the lesser of maximum annual debt service (MADS), 10% of proceeds, or 125% of average annual debt service.
KEY RATING DRIVERS
MODEST FINANCIAL METRICS: Financial margins are projected to provide senior coverage of 1.2 times (x) and all-in coverage of 1.15x, and cash on hand at closing is projected at approximately three to four months operating expense. The senior and subordinate bonds are rated on par, reflecting the small amount of subordinate bonds to be issued and nominal distinction in coverage between the two liens. The ratings may diverge in the future if these factors change.
HIGH DEBT: Debt levels will be high following system acquisition but moderate in time given the minimally capital intensive nature of the system and lack of additional borrowing plans.
FAVORABLE SERVICE AREA CHARACTERISTICS: A substantial portion of the solid waste system service area includes The Villages, a large and very successful self-contained retirement community in central Florida with numerous amenities and entertainment venues. The service area has experienced very strong growth and is approaching full build-out. Resident income levels are high.
ESSENTIALITY AND EXCLUSIVITY: The district is designated the exclusive provider of essential solid waste services within the vast majority of the service area through the life of the bonds. STABLE PLEDGED REVENUE STREAM: System revenue is largely derived from residential accounts and collected as a fixed monthly assessment charge eliminating risk to variability in waste generation. Historical collection rates are solid although enforcement mechanisms are weak.
COMPETITIVE RATES: System rates are established by the district without regulatory oversight or approval. Current residential service charges remain in-line with other area solid waste systems. The district's financial projections reflect very modest increases following system acquisition.
AVERAGE LEGAL COVENANTS: The trust indenture establishes a rate covenant and additional bonds test of 1.2x on the senior lien bonds and 1.05x on the subordinate bonds.
NSCUDD is a local unit of special purpose government created pursuant to Chapter 189 Florida Statutes and by ordinance enacted by Sumter County in July 2010. The district was formed for the purpose of acquiring and operating certain utility systems within unincorporated Sumter County, including the solid waste system to be acquired with proceeds of the current issuance.
The solid waste system service area is comprised of 20,079 acres encompassing a substantial portion of The Villages, an affluent active adult retirement community in north central Florida approximately 60 miles northwest of Orlando.
INDEPENDENT GOVERNANCE STRUCTURE
System oversight and policy planning are carried out by a seven-member board of directors, each elected from the system's service area. An independent special district, Village Center Community Development District (VCCDD), will continue to provide billing, collection, accounting and other management services following system acquisition (VCCDD provides similar services to other utilities and community development districts within The Villages). All revenues collected by VCCDD are deposited with the district on a daily basis.
Fitch believes NSCUDD's independent governance structure insulates it from a recent tentative IRS finding that VCCDD is not a 'political subdivision' of the state, and therefore bonds issued by VCCDD are not tax exempt, because a controlling portion of the VCCDD governing board was elected by a single property owner.
The district is the exclusive provider of solid waste service to all residential accounts within Sumter County, representing approximately 87% of the system's total residential customer base, pursuant to a development order expiring Dec. 31, 2043. Essentially all other residential accounts are subject to a development order issued by Marion County expiring Dec. 31, 2023 which is being considered for extension through 2042 on Dec. 18.
Basic waste collection and disposal services are separately administered via contractual arrangement with an experienced operator. Service contracts contain provisions for termination, renewal, and pricing that are fairly standard for similarly operated solid waste systems.
HIGHLY SUCCESSFUL RAPIDLY GROWING RETIREMENT DEVELOPMENT
The service area presently includes 40,766 residential customer accounts, up from 29,653 in 2007. Build-out is expected at 50,737 residential customers in 2017. Customer growth is driven by the impressive rate of new home sales within The Villages. A total of 2,309 new homes have been sold through the first 10 months of 2012. From 2000-2011 an average of 2,738 homes were sold annually within The Villages. Despite persisting weak economic conditions in recent years, the lowest number of new home sales occurred in 2009 with 2,115.
The average home sales price in 2012 is $241,000 (just 9.6% from the peak average sales price of $257,000 in 2006) and the average income of home buyers on financed purchases is reported at $99,803 (income information from the U.S. Census Bureau is not available for the service area).
The system also includes 208 container sites for the collection of commercial waste. Commercial revenues are not a significant rating factor, projected to equal less than 6% of gross system revenue in 2013.
STRONG REVENUE COLLECTION HISTORY
More than 90% of gross operating revenue will be collected from residential property owners as part of a consolidated monthly bill for water, wastewater, solid waste, and amenities (golf, swimming, fishing lakes, fitness trails, and other organized activities). From 2007-2011 solid waste collections averaged a solid 97.4%.
Payments made on the consolidated bill are not applied pro-rata or on an all-or-none basis but follow an order of priority with the solid waste component last among the charges noted above. The only enforcement mechanism available to ensure collection of the solid waste charge is the assessment of a 5% penalty upon delinquency, which occurs after 20 days from the date of delivery.
NARROW FINANCIAL PERFORMANCE ANTICIPATED
The district's financial forecast depicts annual debt service coverage approximating 1.15x on an all-in basis. Fitch views this level to be modest although sufficient given the somewhat limited risk associated with operating the system, its stable revenue performance, and the district's independent rate setting authority and competitively priced rate structure.
At closing system liquidity will consist of a working capital account equal to 1 month of operating expenditures (approximately $516 thousand) and a utility guaranty fund equal to $1.8 million to be funded by the seller and held by the trustee. This account is designed to provide short-term rate relief if the seller's projections of additional home sales do not materialize and rates need to be increased to comply with the rate covenant.
Residential rates were increased 5.8% in March 2012 for the first time in almost four years to $17.90 per month which remains comparable to the cost of service provided similar utilities in the area. The district's financial forecast includes minor rate increases of 1.8% for 2013 and 2% for 2014; otherwise, no rate increases are contemplated.
Fitch notes that the district's annual budget is subject to the approval of Sumter County (implied GO bonds rated 'AA-' by Fitch). If a budget is not approved the district shall operate in accordance with the provisions of its last approved budget. The county has covenanted that it will take no action that impairs the district's ability to pay its outstanding bonds.
HIGH DEBT LOAD
System debt is high measured against net plant assets, system equity, and on a per capita basis. Debt carrying charges are expected to consume close to one-third of gross revenue. Debt amortization is also very slow with about 50% of principal repaid within the first 20 years.
NSCUDD's capital assets are essentially comprised of waste containers - as such future capital pressures and borrowing needs are expected to be minimal offsetting any debt related concerns along with the system's reasonable rates.
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, and National Association of Realtors.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria', dated Aug. 14, 2012;
--'U.S. Local Government Tax-Supported Rating Criteria', dated Aug. 14, 2012;
--'Rating Guidelines for Solid Waste Revenue Bonds', dated June 22, 2012.
Applicable Criteria and Related Research:
U.S. Local Government Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Outlook
Rating Guidelines for Solid Waste Revenue Bonds