SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has affirmed the following tax allocation bonds (TABs) for Banning Community Redevelopment Agency, CA (the RDA):
--$29.4 million TABs, series 2007 (Merged Downtown and Midway Redevelopment Project), at 'BB+'.
The Rating Outlook is Stable.
The bonds are secured by tax increment collected within the sole project area, net of a 20% low-moderate housing set-aside, county charges, and various other statutory senior pass-through payments.
KEY RATING DRIVERS
TIGHT DEBT SERVICE COVERAGE: The below investment grade rating largely reflects tight debt service coverage levels and vulnerability to further assessed valuation (AV) declines. A very small drop in AV could take coverage below 1.00 times (x) maximum annual debt service (MADS) and increase the likelihood of a draw on the cash-funded debt service reserve fund (DSRF).
PRESSURED TAX BASE: The Stable Outlook reflects Fitch's assessment that the large, somewhat mature project area with good taxpayer diversification is poised for long-term growth despite near-term pressure following a 23% AV decline over the past four years and outstanding appeals. County projections for 2% annual growth in AV for fiscal 2014 and beyond appear somewhat reasonable as the county's real estate market continues to recover.
MIXED SOCIO-ECONOMIC CHARACTERISTICS: The local economy is characterized by a high but declining unemployment rate, low income levels on a per capita basis, and an above-average individual poverty rate.
SATISFACTORY AB 1X 26 IMPLEMENTATION: The city has been recognized as a successor agency (SA) to the redevelopment agency. The rating incorporates the expectation that the SA will continue its satisfactory implementation of AB 1X 26 (dissolution legislation) procedures. Several recognized obligation payment schedules (ROPS) have been approved by the oversight board, county, and state, and the SA has received timely and sufficient payments to cover revenue bond debt service for fiscal years 2012-2014.
HOUSING REVENUE AVAILABILITY: The city, as SA, retains access to housing set-aside revenues no longer restricted to this purpose following the dissolution of redevelopment. Fitch's methodology conservatively excludes such revenues from debt service coverage calculations, as they are not pledged to debt service payment on non-housing TABs. However, they appear to be available to the SA should it require them for such purposes.
COVERAGE CHANGES: The rating is highly sensitive to shifts in AV given the tight coverage levels. While Fitch considers the prospects for AV stabilization and/or slow expansion to be reasonable given the generally improving county real estate market, an unexpected AV decline could bring annual debt service coverage to below 1.00x and trigger a draw on the DSRF. The 'BB+' rating could withstand a marginal draw on the DSRF but would likely be downgraded if revenue performance caused further draws on, and/or inability to replenish, the DSRF.
The city of Banning is located in western Riverside County, 84 miles east of downtown Los Angeles and 23 miles west of Palm Springs, situated on the major I-10 distribution route.
The merged project area is large at 3,283 acres and makes up a significant part of the city, encompassing 22% of the city's land area and 35% of its population of almost 30,000. Riverside County's socioeconomic characteristics are somewhat mixed. Per capita money income is below-average while the individual poverty rate is above-average. However, median household income is above-average when compared to the national rate. While the city stands to benefit from the return to growth in some of the region's employment sectors, the county's unemployment rate remained a high 9.6% in April 2013 (down from 11.6% a year prior).
TAX BASE VULNERABILITY
The project area's historical AV growth was extremely high. This was primarily due to a large amount of new development and price increases spurred by the city's relative affordability and accessibility to major surrounding employment centers. However, the recession substantially lowered property prices and slowed new development, causing AV to drop by 23% and incremental valuation (IV) to fall sharply by 31% during fiscal years 2010 and 2013.
The rate of AV decline slowed to a minimal 0.5% in fiscal 2013, suggesting the property market has reached bottom. The county is projecting a 2% annual increase in fiscal 2014 and outyears. Such a projection appears reasonable in light of countywide economic improvement. However, for the project area, AV growth will more likely result from increasing valuations on existing properties than new development since little new construction is currently slated. Increasing existing properties' valuations could add impetus to appeals which in fiscal 2012 resulted in an AV loss of $4.7 million, approximately 1% of the project area's AV.
The tax base is somewhat mature, with a fiscal 2013 IV to base year AV ratio of 206% (down from a peak 299% in fiscal 2009). Due to AV declines, fiscal 2012 total tax increment revenues declined approximately 7% from fiscal 2011. The bulk of the project area's property is secured (88.3%) and this secured property is well diversified (66% commercial, 32% residential, and 2% vacant). Taxpayer concentration is low, with the top 10 taxpayers representing only 19% of fiscal 2013 IV.
POTENTIAL DEBT SERVICE COVERAGE PRESSURE
The majority of the SA's debt is its 2003 and 2007 parity TABs, which amortize very slowly. Debt service coverage on the existing parity TABs has shrunk to low levels with recent AV declines. Fiscal 2013 ADS coverage is 1.08x without subordinated pass-through payments. This is down from 1.47x in fiscal 2010 when AV started to decline. MADS occurs in fiscal years 2016 and 2017 and MADS coverage is projected to be only 1.05x in fiscal 2014. Debt service payments decline slightly each year thereafter through fiscal 2029 when the 2003 TABs finally mature, followed by much lower annual debt service payments through fiscal 2038 when the 2007 TABs finally mature.
Fitch is concerned that even minor weakening of the property market would negatively affect debt service coverage. Taking into account the current rate of successful appeals, it would only take another 2% AV decline to reduce MADS coverage to below 1.00x. This assumes that subordinated pass-through payments are not made. A draw on the cash-funded DSRF remains a possibility over the near term. However, excess housing set-aside revenue, while not factored into the rating, could be made available by the SA to plug debt service shortfalls.
SATISFACTORY AB 1X 26 IMPLEMENTATION
The SA has successfully completed the July through December 2013 ROPS approval process with the state Department of Finance (DOF). The SA has received a Finding of Completion letter from DOF, acknowledging the successful completion of two due diligence reviews.
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, 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
U.S. Local Government Tax-Supported Rating Criteria