NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the following bonds for the city of Orlando:
--$181.7 million senior lien tourist development tax (TDT) revenue bonds (sixth cent contract payments) series 2008A at 'BB+';
--$33.4 million second lien subordinate TDT revenue bonds (sixth cent contract payments) series 2008B at 'B'.
The Rating Outlook for the senior lien bonds is revised to Positive from Stable.
The Rating Outlook for the second lien subordinate bonds is Stable.
SECURITY
The 2008A and 2008B revenue bonds are limited obligations of the city secured by the discrete trust estate, including pledged funds, for each respective series of bonds. The majority of pledged funds consist of 50% of a one cent tax levied county-wide on hotel stays. The hotel tax is collected by the county and remitted to the city according to an interlocal agreement.
Pledged revenues also include a fixed installment payment payable from the remaining half of the one cent tax, and equal to $2.8 million available through 2018. Pledged funds are allocated to each trust estate of the three series of bonds (Fitch does not rate the series 2008C bonds) according to a flow of funds with revenues distributed to each trust estate according to the seniority of the series. Additional security is provided by a dedicated liquidity reserve and debt service reserve fund for each series with each established at 50% of respective maximum annual debt service (MADS) for a total combined reserve for each series of 100% of MADS.
KEY RATING DRIVERS
OUTLOOK REVISED TO POSITIVE: The revision in Outlook from Stable to Positive for the senior lien bonds reflects the consistent expansion of TDT receipts now extended for over three years. This growth trend is expected to continue as five month collections for fiscal 2013 are up significantly over prior year to date collections and nearly 25% above partial year fiscal 2009 receipts.
With 15% declines in fiscals 2001-2002 and 2009, the TDT remains an economically sensitive and volatile revenue.
THIN DEBT SERVICE COVERAGE DESPITE TDT GROWTH: Debt service coverage for the senior series 2008A bonds and combined senior bonds and subordinate series 2008B bonds has improved but remains thin, even with recent TDT growth. Negligible revenue growth for the series A bonds and generally modest growth for the series B bonds are required to ensure payment of both series of bonds without a draw upon reserves.
RESERVE CUSHION: Each series of bonds was issued with a liquidity reserve equal to 1/2 maximum annual debt services (MADS) and a debt service reserve account (DSRA) equal to 1/2 MADS, with the intention that the cushion could provide sufficient cash flow to compensate against periods of weak revenue performance. A one-time cash infusion from unused construction proceeds has fully replenished the liquidity reserve for the series 2008B bonds, and the liquidity reserve for the series 2008A bonds remains fully funded. There has never been a draw on either DSRA.
BONDHOLDERS PROTECTED UPON CROSS DEFAULT: A default for any of the series results in a cross default under the indenture. The ensuing flow of funds is structured to honor the lien status.
NO ADDITIONAL DEBT: Additional debt is prohibited under the indentures, excluding refundings.
PREMIER TOURIST DESTINATION: The city is home to Disney World, a world-class tourist attraction. The strength of the amusement park and other area attractions has enabled the leisure industry to rebound relatively quickly from downturns.
RATING SENSITIVITIES
SUSTAINED TDT GROWTH: Continuation of TDT growth could lead to positive rating action for the senior lien bonds.
DECLINE IN TDT REVENUE: Conversely, a reversal of recent positive trends could lead to coverage at levels inconsistent with even the current low ratings.
CREDIT PROFILE
CONSISTENT THREE YEAR TDT GROWTH
TDT revenues are experiencing a sustained recovery which is now entering its fourth year. Five month fiscal 2013 year-to-date collection through February 2013 are up 6.3% from the equivalent period in fiscal 2012 and are 24% higher than in the first five months of fiscal 2009.
Since February 2010, TDT collections have increased every month on a year over year basis, with two exceptions. The first exception was a negligible 0.4% drop in December 2011 collections. The second exception was a 35% month over month decrease in September 2012, attributable to a sizable litigation settlement between the county and Expedia.com which was tacked on to September 2011 collections. Adjusting for the settlement payments, September 2012 TDT revenues expanded by a healthy 5.1% over prior year revenues. For the entire fiscal 2012, TDT revenues gained 4.2% net of the Expedia settlement and have grown a substantial 19% since fiscal 2009.
The ongoing recovery has been boosted by a combination of pent-up theme park demand according to officials, an improving economy, an influx of foreign visitors and a Harry Potter attraction at the Universal Theme Park which opened in 2010. Area hotel occupancy and room rates, excluding Disney hotels which are not publicly disclosed, have exhibited solid growth since 2009.
Both Disney World and Universal are in the process of making sizable investments in their Orlando theme parks. Disney recently opened the first phase of its Fantasyland expansion and is about to begin the renovation of Downtown Disney. Universal is in the process of developing an 1,800 room hotel on-site and will be premiering a new Transformers ride during the summer. New features at existing theme parks, such as the planned Antarctica ride at SeaWorld and the expansion of Legoland, are expected to further boost visitor numbers.
HISTORICAL GROWTH MARRED BY PERIODS OF SHARP DECLINES
Historical TDT revenues experienced robust growth, increasing at an average annual rate of 12.7% from 1979 to 2000. During the past decade, however, the TDT suffered its first-time annual drop falling 3.1% in fiscal 2001. The TDT fell an additional 12.6% in fiscal 2002 and 15.4% in fiscal 2009. The recent volatility of the revenue stream underscores the economically sensitive nature of the TDT and its dependence upon the local tourist sector.
Some revenue stability is provided by an annual installment payment equal to $2.8 million to be received monthly through Nov. 15, 2018. In fiscal 2012, the installment payments equalled 16% of pledged revenues.
THIN COVERAGE RATIOS, CUSHIONS FROM RESERVES
Despite the recovery in TDT collections, coverage of series 2008A and 2008B debt service remains thin. The bonds were structured with the larger principal and interest payments payable on Nov. 1 as revenue collections have historically been more robust during the summer months.
The flow of funds is unusual as the first interest payment in each bond year is paid across all series while for the second principal and interest payment, senior debt service is paid prior to the second and third liens. As a consequence, debt service requirements are substantially higher for November payment dates. Both on a historical and projected basis, coverage has been narrower for the November dates, and Fitch rates to these lower ratios.
TDT revenues collected from March through August of 2012 provided a slim 1.25x debt service coverage for the series 2008A November, 2012 payment. September through February 2013 revenues will cover the May, 2013 interest-only bond payment much more robustly at 1.87x. For full year 2013 series 2008A debt service, projected TDT coverage is a narrow but improving 1.4x. Payment of all series 2008A bonds without a draw on the reserve funds requires very modest TDT growth over the life of the issue.
Under the Fitch base case scenario of 2.3% annual growth, equal to the average annual growth since fiscal 2000, TDT revenues would provide debt service coverage of at least 1.2x. Fitch stress scenarios that mirror the severe historical revenue declines of the past decade, followed by a conservative recovery and then baseline growth, demonstrate that reserves would be required to augment pledged revenues.
For combined series 2008A and subordinate series 2008B debt service, TDT revenues provided slim 1.13x coverage in November, 2012. Under the Fitch base case scenario, TDT coverage would range from 1.1x - 1.2x through November 2020. Fitch stress scenarios described above would result in a default of the series B bonds.
CASH RESERVES OFFSET TDT VOLATILITY
The liquidity reserves for each series were established to compensate for expected fluctuations in TDT collections. Use of the liquidity reserve does not constitute a material event, and use of the DSRA does not constitute a default. The series 2008A liquidity reserve has been fully funded since the middle of 2009 when it was replenished subsequent to a draw to compensate for lower than anticipated capitalized interest earnings. The series 2008B liquidity reserve was replenished in July, 2011 with the payment of $392K of unused construction. The DSRA has never been utilized for either series of bonds.
ADEQUATE BONDHOLDER PROJECTIONS
Legal provisions include a cross-default provision, which stipulates that the default of one series of bonds under the indenture is an event of default under all indentures. Upon default, the flow of funds directs payment of principal and interest to the holders of the series 2008A bonds and subsequently to the owners of the 2008B bonds, prior to any payments to third lien bondholders.
It is likely that a cross-default will occur during the life of the bonds, given that the series 2008C defaults in the Fitch base case scenario and in all of the stress tests. Average annual revenue growth of 11.1% is required to generate sufficient income to avoid default on the series 2008C through 2020. Fitch considers this to be optimistic, given the recent trend of TDT volatility.
Additional debt is prohibited under the indenture, except for refundings. Additional bonds for refunding purposes may be issued if, during any consecutive 12 of the previous 25 months, contract revenues equaled at least 1.33x MADS on all existing and proposed debt and 1.10x MADS on all senior and second-lien bonds. The calculation excludes installment payment revenues.
CENTRAL FLORIDA ECONOMY STRENGTHENS
The local economy is experiencing a sustained recovery as evidenced by solid job growth and lowered unemployment rates. Employment levels within the Orlando metropolitan statistical area (MSA) increased by 1.7% and 2.6% in 2011 and 2012, respectively after three consecutive years of job losses. MSA employment for February 2013 shows a year over year increase of 3.2% or approximately 32,000 jobs. Consequently, unemployment rates have dipped from over 10% during 2011 to 7.1% as of February, below the state and national rates of 7.8% and 7.7%, respectively.
The leisure and hospitality sector is a major component of the local economy, comprising about 21% of total employment and leads all other sectors in job growth over the past several years. Disney is the dominant player, employing about 58,000 or over 10% and 5% of county and MSA employment, respectively. Universal reports 13,000 employees while SeaWorld of Orlando's workforce totals approximately 7,000. Beside growing TDT collections, consistent expansion in leisure and hospitality employment and generally higher occupancy and hotel room rates reflect the growing strength of this sector.
Economic diversification continues to take hold, most notably within the education and health services sectors. A growing biotechnology and life sciences cluster is anchored by The University of Central Florida's (UCF) Health Sciences Campus, which is home to its College of Medicine and the Burnett College of Biomedical Sciences, in addition to M.D. Anderson Cancer Center and Sanford-Burnham Medical Research Institute. In addition, Nemours Children's Hospital recently opened and completion of a new Veteran's Administration hospital is projected for mid to late 2013. Arduin, Laffer & Moore Econometrics estimated the creation of 30,000 jobs and $7.6 billion in economic impact over 10 years as a result of the UCF activity and related life sciences development.
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, 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
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=789462
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