SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has affirmed the following tax allocation bonds (TABs) for Riverside Public Financing Authority, CA (the PFA):
--$8.3 million (Casa Blanca & Downtown/Airport Redevelopment Projects) TABs, series 2007A, at 'BBB';
--$13.4 million (Casa Blanca & Downtown/Airport Redevelopment Projects) taxable TABs, series 2007B, at 'BBB'.
The Rating Outlook is Stable.
The bonds are secured by loan repayments to the authority from net tax increment revenue in both of the project areas. While revenue pledged to debt service combines repayments from both project areas, neither is responsible for the shortfall in the other's payments per the TAB indenture. The bonds additionally are backed by an MBIA debt service reserve surety bond of questionable value.
KEY RATING DRIVERS
ADEQUATE DEBT SERVICE COVERAGE: Fitch-estimated fiscal 2013 annual debt service coverage levels are adequate to sound at 1.32x and 1.48x for the Casa Blanca and Downtown Airport project areas, respectively. These levels hold up sufficiently under Fitch-designed stress scenarios.
WEAKEST LINK ANALYSIS: As a several but not joint obligation, the rating is based on Fitch's assessment of the weakest of the two project areas. Fitch views the Casa Blanca project area as the weaker of the two.
HIGH TAX BASE CONCENTRATION: Both tax bases are very concentrated among the top 10 payers; however, this risk is mitigated somewhat by a high IV/base year value, reflective of the maturity of the project areas.
ECONOMIC RECOVERY UNDERWAY: The city's economy was severely affected by the housing downturn, but recent data points to strong employment growth and rebounding home prices.
COMPLIANCE WITH DISSOLUTION PROCEDURES: Dissolution-related risks are being mitigated as management is continuing to adhere to indenture requirements, necessary revenue tracking is in place, timely and robust continuing disclosure reports are being provided, and debt service reserves are being used to mitigate dissolution-related cash flow issues.
ASSESSED VALUES AND COVERAGE: The rating is sensitive to shifts in fundamental credit characteristics including the project areas' AV performance and debt service coverage levels. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.
Riverside is located in western Riverside County in California's Inland Empire. The project areas together comprise a very large 16,295 acres and 44% of the city's fiscal 13 AV.
SOLID EMPLOYMENT GAINS, HOUSING MARKET RECOVERY
The local economy is in its fourth year of employment recovery following severe jobs losses in 2008 and 2009. A substantial amount of job losses occurred in the metropolitan area's construction industry, which today employs about two-thirds of its 2008 workforce and continued to contract year-over-year through April 2013 despite an uptick in the state's construction industry. Gains in other employment sectors lowered unemployment to a still high 9.7% from 11.7% over the same period. Total employment increased a solid 2.6% (more than double the national growth rate) to nearly 150,000, a level that has finally exceeded the city's prior employment peak reached in 2007.
The city's housing market has realized substantial gains over the past year with May 2013 values up an impressive 19.8% year-over-year according to Zillow. January 2013 values were up 13.9% year-over-year and are the basis upon which fiscal 2014 AV levels will be determined. AV in the project areas is unlikely to rise by the same degree as home market values for three reasons. First, the project areas contain significant commercial real estate concentration, and changes to commercial values have lagged residential values over the past several years. Second, Proposition 13 limits AV increases to no more than 2% annually (unless property turns over), except for properties subject to a Proposition 8 AV reduction. It is unknown what proportion of properties in the project areas are subject to Proposition 8. Last, it's unclear to what extent city-wide residential home value gains apply to the housing stocks located within the project areas.
Despite these limitations, Fitch believes the project areas ultimately will benefit by some positive valuation tailwinds from the broader regional real estate recovery. Fitch conservatively includes2% AV gains in its base case coverage scenarios through fiscal 2015 and 1% gains thereafter. To the extent the project areas realize growth in excess of these estimates, there could be positive credit implications assuming these gains appear likely to hold or expand.
CASA BLANCA PROJECT AREA STABILIZING
The Casa Blanca project area is highly concentrated and small at 725 acres but is centrally located and mature. Established in 1977, the project area benefits from a high IV/base year ratio of 1608%, resulting in a low degree of revenue sensitivity to AV volatility. The project area additionally benefits from a diverse mixture of taxpayers by land use. As of fiscal 2007 (the most recent land use information available), the project area's AV was 43% residential, 21% commercial, 13% industrial, and 11% unsecured. The top 10 taxpayers make up 32% of AV and a high 34% of IV.
Severe residential home price declines resulted in a significant two-year cumulative AV decline of 11% in fiscal years 2010 and 2011. However, AV declines moderated in fiscal 2012 to just 0.6% and 2013 AV gained a modest 1.3%. The agency's fiscal consultant is projecting that pending appeals will result in a $7.2 million AV loss, or a manageable 2.2% of AV. This represents a slightly higher level of appeals than the prior year's 1.5%.
Fitch estimates the project area's net revenues at $2.44 million, based on fiscal 2013 AV, covering parity debt service of $1.85 million by an adequate to sound 1.32x. If appeals are applied at levels the fiscal consultant currently is projecting on top of a Fitch-projected 2% AV gain (based on favorable regional real estate conditions through January 2013), Fitch-estimated debt service coverage will fall slightly to 1.29x in fiscal 2014. Under a severe Fitch-designed stress scenario, a 50% increase in the consultant-projected appeals success rate in fiscal 2014, in addition to a repeat of the project area's peak-to-trough 11.5% AV decline, would lower coverage to 1.12x. Fitch estimates AV could contract 21.5% from fiscal 2013 levels for maximum annual debt service (MADS) coverage to reach 1.0x.
DOWNTOWN/AIRPORT PROJECT AREA EXPOSED TO HIGH AND RISING APPEALS
The Downtown/Airport merged project area is highly concentrated, but mature and quite large at 2,415 acres. The project area's sub-areas were established in 1971 and 1976, with a correspondingly high IV/base year ratio of 715%. Land use is concentrated in non-residential taxpayers, with residential AV making up just 16% of the total. The top 10 payers make up 34% of AV and a high 39% of IV. The project area experienced a fairly modest 4.2% AV decline from its fiscal 2010 peak to fiscal 2012 and AV increased by a slight 0.5% in fiscal 2013.
However, the project area is facing a large and growing backlog of pending AV appeals. The fiscal consultant is projecting a related AV loss of $108 million (8.2% of AV) in fiscal 2012, up slightly from $93.6 million (7%) two years ago. If the appeals are resolved as projected by the fiscal consultant without offsetting AV gains, Fitch may view the project area as more consistent with the Casa Blanca credit profile, the weakest link and basis for the 'BBB' credit rating.
Fitch estimates the project area's net revenues at $5.4 million, based on fiscal 2013 AV, covering parity debt service of $3.6 million an adequate 1.48x. If appeals and Prop 8 AV reductions are applied at levels the fiscal consultant currently is projecting on top of a 2% AV gain, then Fitch-estimated fiscal 2014 debt service coverage would fall to an adequate 1.35x. Under a severe Fitch-designed stress scenario, a 50% increase in the consultant-projected appeals success rate in fiscal 2014, in addition to a repeat of the project area's peak-to-trough 4.2% AV decline, would lower coverage to 1.21x. AV would need to contract an estimated 25% from fiscal 2013 levels for MADS coverage to reach 1.0x.
SATISFACTORY ADMINISTRATIVE PROCEDURES OFFSET DISSOLUTION RISKS
Management appears to be acting in conformity with its bond indentures, despite the administrative hurdles imposed by dissolution law (AB 1X 26). Management is continuing to track revenues on a project area-specific basis and is adhering to the senior/subordinate status of its various obligations. Dissolution law imposed a cash flow timing issue on the agency, which is being fully mitigated with the use of a debt service reserve fund, allowed under AB1484. Continuing disclosure remains timely and robust and the agency received its finding of completion from the state's department of finance.
HOUSING REVENUE AVAILABILITY
The lack of distinction between former housing set-aside revenue and total tax increment under AB 1X 26 does not affect Fitch's assessment of credit quality. The aggregation of tax increment results in higher calculated debt service coverage levels for Fitch-rated bonds. However, this is inconsistent with the bond indenture, which specifies that only non-housing increment is pledged. Fitch believes further clarification as to the availability of revenue not pledged under the indenture is needed before factoring this increased coverage into the rating.
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 and Zillow.
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