Fitch Affirms Manchester/Ballas CID, MO Sales Tax Revs at 'BBB'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the following Manchester/Ballas Community Improvement District, Missouri (the district) bond rating at 'BBB':

--$10.6 million sales tax revenue bonds, series 2009.

The Rating Outlook is Stable.

SECURITY

The bonds are limited obligations payable solely from the net revenues of a 1% sales tax on retail sales collected within the district, subject to annual appropriation.

KEY RATING DRIVERS

ECONOMICALLY SENSITIVE AND GEOGRAPHICALLY LIMITED TAX: The bonds are secured by economically sensitive sales tax revenues generated exclusively within a mall.

THIRD-PARTY RISK: Sales tax collections are reliant upon the continuous operation of the mall, which is owned by a single corporate entity.

PAYER CONCENTRATION: There is point-of-sale concentration with the top 10 payers accounting for roughly 39% of total 2012 revenues.

TURBO REDEMPTION FEATURE: The bond's mandatory prepayment (turbo) feature coupled with one bullet maturity provides payment flexibility.

ANNUAL APPROPRIATION: The pledge of revenue is subject to annual appropriation; however, there is little incentive not to appropriate, as the revenues remain stranded if not appropriated.

RATING SENSITIVITIES

CONTINUOUS MALL OPERATION: The rating is sensitive to the continued operation and upkeep of the mall, since a lack of maintenance or shuttering of the mall would materially impair sales tax collections.

ADEQUATE REVENUES: The rating is sensitive to the district's continued ability to generate adequate sales tax revenue from generic retail establishments located within a small geographic area.

Potential for rating upgrades is limited, given the district's extremely small geographic area, point-of-sale concentration, potential for future competition, and the reliance on a single third party to maintain and operate the property. All of these factors present significant risk that future sale tax revenues could decline materially and even permanently prior to full redemption.

CREDIT PROFILE

The district encompasses a very small area, taking in substantially all of the West County Center mall, exclusive of the three anchor tenants (Nordstrom, Macy's, and JC Penney). The mall is advantageously located seven miles west of downtown St. Louis in the affluent city of Des Peres.

The district, which was created in December 2007 by petition of certain property owners, is governed by a five-member board of directors currently consisting of the mayor of the city of Des Peres, a financial services employee, and three employees of the mall developer.

Although the anchor tenants do not generate tax revenue, they provide long-term stability to the mall, since both Macy's and JC Penney's own their respective property and Nordstrom leases its space under a long-term lease agreement.

The majority of the remaining retail stores lease space under agreements with varying expirations dates. The mall has experienced some retail turn-over over the past year; however, the changes have not adversely impacted sales tax revenues.

City residents display a superior socioeconomic profile with median household income at 260% of the 2011 state average. However, given the mall's regional draw, a portion of retail sales are most certainly derived from shoppers residing outside the city limits. Currently there are 142 retail stores or restaurants located within the district. There is point-of-sale concentration with the top 10 taxpayers accounting for 39% of total sales tax revenues in 2012.

BOND STRUCTURE

The bonds are structured as one bullet maturity in 2029 with a special mandatory redemption feature whereby all excess sales tax revenue at the bottom of the flow of funds is required to redeem a portion of the bullet maturity. The structure provides important payment flexibility as the bonds are secured by an economically sensitive sales tax. The bonds were also structured such that 50% of all sales tax revenues were diverted to a TIF district, until the earlier of repayment of outstanding TIF bonds or December 2020. Those TIF bonds have been fully redeemed and the entire 1% is now available to support these bonds.

REPAYMENT SCENARIOS

Pledged revenues for 2012 increased by a strong 7.8% from the year prior. Fitch expects revenues available for debt service to approximately double in 2013, given the redemption of the TIF bonds.

Assuming 2012 revenues (adjusted for redemption of TIF bonds) are held flat and no further subordinate debt is issued, Fitch calculates that annual collections would be adequate to service required interest payments plus annually retire a portion of the bullet maturity to fully redeem the bonds by 2021. As a stress test, collections could decline 10% annually beginning in 2014 and sales tax collections plus the cash funded reserve would be adequate to retire the bonds by the stated maturity date.

MALL FUNDAMENTALS CURRENTLY GOOD

The mall was 98.9% occupied as of January 2013. Occupancy cost, defined as rent as a percentage of sales, is a Fitch measurement indicating the overall health of the mall. Occupancy costs usually range between 12%-15%; the mall is solidly within this range at 12.9%. As the occupancy cost percentage nears 20%, there is more concern that rents may be too high and tenants may vacate to a competing mall.

In-line sales per square foot (psf) from tenants occupying less than 10,000 square feet is a standard metric used by Fitch to evaluate mall performance. The mall generated in-line sales psf of $492 for the trailing 12 month period ending September 2012, which is considered good by Fitch. This represents an increase over $475 psf a year prior.

Mall fundamentals are currently good, but the highly concentrated sales tax base represents significant risk that pledged revenues could decline materially, and even permanently, prior to full redemption.

The mall is owned and managed by West County Mall CMBS LLC, whose sole member is a joint venture with CBL & Associates, Inc. (CBL) and TIAA-CREF. CBL is one of the largest publicly traded mall real estate investment trusts in the United States. As of February 2013, CBL owns controlling interests in 163 properties, including 94 enclosed malls and open-air centers throughout the U.S.

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, and 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

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

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Contacts

Fitch Ratings
Primary Analyst
Arlene Bohner, +1-212-908-0554
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Stephen Friday, +1-212-908-0384
Analyst
or
Tertiary Analyst
Ryan Frank, +1-312-368-3133
Senior Director
or
Committee Chairperson
Karen Ribble, +1-415-732-5611
Senior Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Arlene Bohner, +1-212-908-0554
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst
Stephen Friday, +1-212-908-0384
Analyst
or
Tertiary Analyst
Ryan Frank, +1-312-368-3133
Senior Director
or
Committee Chairperson
Karen Ribble, +1-415-732-5611
Senior Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com