NEW YORK--()--(This is a correction of a release originally issued January 15, 2013. It contains amended details regarding the amount and use of district cash available for debt service and tax levying capacity available to the district in cases of taxpayer non-payment.)
Fitch Ratings downgrades to 'BBB-' from 'BBB+' its ratings on the following Howard Bend Levee District, Missouri (the district) securities:
--$19,145,000 million levee district refunding and improvement bonds, series 2005';
--$5,230,000 (Creve Coeur airport sub-area) levee district improvement bonds, series 2007.
The Rating Outlook is Stable.
The bonds are special limited obligations payable solely from a special levee tax (SLT) against certain benefited properties. The amount of the SLT is proportionate to the benefits conferred upon each parcel. The bonds are also secured by deal-specific, cash-funded debt service reserves funds (DSRF) equal to the IRS standard.
KEY RATING DRIVERS
LIMITED EXCESS CASH AVAILABLE FOR DEBT SERVICE: The 'BBB-' rating reflects the limited cash available for debt service outside of annual collections. While coverage is still sufficient, the district's plan to drawdown capital improvement funds for district improvements, while appropriate, nonetheless provides less protection against potential revenue disruption and therefore reduces credit quality.
MARGIN OF ADDITIONAL FINANCIAL FLEXIBILITY: The district maintains the authority to levy up to 1.1x coverage for annual debt service as well as a maintenance levy available but not intended for debt service. It currently levies an installment levy equal to annual debt service (1.0 times [x] coverage).
SIGNIFICANT TAXPAYER CONCENTRATION: Both series of bonds display considerable taxpayer concentration with the top 10 payers accounting for at least 70% of total collections. The number of taxpayers obligated to repay both series is also extremely limited.
LIMITED ECONOMY: The district's economy is notably small and lacks diversity with gaming, agriculture and governmental interests represented.
WHAT COULD TRIGGER A RATING ACTION
DECLINES IN TAX COLLECTIONS: Interruption in the timely payment of the SLT by top taxpayers would create a major cash flow disruption, which could apply further downward pressure to the rating.
The district encompasses a 10.4 square mile area 20 miles northwest of St. Louis. It was incorporated in 1987 to protect and reclaim land from wash and bank erosion and water overflow. The district's board is comprised of five district property owners.
HIGH TAXPAYER CONCENTRATION
The SLT is levied on 385 benefited properties associated with the series 2005 transaction and 148 benefited properties associated with the series 2007 transaction.
Taxpayer concentration is a significant credit concern. Hollywood Casino St. Louis (the casino) is the largest taxpayer for the 2005 series bonds and accounts for 37% of the total STL on those bonds; the top 10 taxpayers account for 70%. The top taxpayer for the series 2007 bonds is a trust which accounts for 18% of the total SLT, and the top 10 comprise 83%. The project subarea associated with the series 2007 bonds does not include the casino. Major taxpayers for the 2005 series additionally include the State of Missouri, St. Louis County, and Metropolitan St. Louis Sewer District. Major taxpayers for the 2007 series include Creve Coeur Airport Improvement Corp. and city of Maryland Heights.
SLT COLLECTIONS STRUCTURED WITH TIGHT COVERAGE
The bonds are special limited obligations payable solely from an SLT levied on certain property in proportion to the flood abatement benefits for each parcel. The district is required to impose the SLT levy in an amount sufficient to pay debt service on the bonds. The district currently levies a total SLT equal to annual debt service (1.0 times [x] coverage). The district may levy up to 1.1x coverage for its SLT levy and an additional 10% emergency levy, providing up to 1.2x coverage.
The district additionally imposes operating and maintenance levies which accounted for 20% of the district's levy in 2012 and which includes a small margin for uncollected taxes (3-5% of total SLT levy) as part of its maintenance levy.
SLTs are collected by the county and unpaid taxes result in a lien placed upon the delinquent parcel of land; this lien is subordinate to property taxes. Tax collection rates have exceeded 97% since 2007 through the recent economic trough.
The district's ongoing operations are limited (as is the case with most special districts), with the bulk of total expenditures consisting of debt service. Aside from annual levies, the district reports approximately $3.6 million on hand in capital, maintenance and emergency funds which are technically available for debt service. These funds have declined since last year as the district appropriately supported capital and maintenance projects. While Fitch recognizes the district's investment as a credit strength, the reduced liquidity nevertheless diminishes the cushion against potential payment disruptions. The 'BBB-' rating reflects Fitch's expectation that the district will maintain minimal additional funds outside of the DSRF.
Fitch notes that the potential for cash flow volatility in cases of major taxpayer non-payment is a significant credit weakness. In cases of major taxpayer non-payment, cash flow gaps would be filled with the DSRF until collection of the subsequent annual installment levy. The district is legally required to increase the SLT on all payers to support debt service and replenish the DSRF which is cash-funded at $2.5 million or 113% of 2012 debt service.
The timing of SLT levy and collections is satisfactory in that the levy is due Dec 31, in advance of the March 1 principal and interest payment. While Fitch recognizes the district's legal authority to increase revenue in the event of non-payment, Fitch believes the practical application of such authority could prove challenging over an extended term. Fitch notes that the district maintains a strong history of solid SLT collections.
The district's economy is notably limited, reliant predominantly on gaming and agriculture but with governmental and quasi-governmental interests represented. The casino is the largest district employer with approximately 1,800 employees. Penn National Gaming Inc. recently purchased the casino for approximately $610 million in an all-cash transaction and announced it will invest approximately $61 million in updating and rebranding the facility.
Governmental entities are subject to the district's levy under state statute. Some additional development within the district may occur due to the completion of improvements to nearby state highway 141.
Additional information is available at 'www.fitchratings.com'.
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.
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