AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings has taken the following rating action on Ernest N. Morial-New Orleans Exhibition Hall Authority, Louisiana (the authority) bonds:
--$130.2 million special tax bonds, series 2004 and 2012 affirmed at
The Rating Outlook is revised to Stable from Positive.
The bonds enjoy a first lien on the pledged revenues, consisting of hotel occupancy, food and beverage, and service contractor and tour taxes collected within Orleans Parish, a $2 million annual appropriation by the state legislature from the state's sales tax on hotel occupancy in New Orleans, and by a portion of the 1% hotel tax collections by the Regional Transit Authority (RTA).
The bonds are additionally secured by a cash debt service reserve funded at maximum annual debt service (MADS).
The prior senior lien was closed in 2003 and there are no longer any senior bonds outstanding.
KEY RATING DRIVERS
OUTLOOK REVISION: The Outlook revision to Stable reflects Fitch's view that the 'A+' rating appropriately incorporates the risk associated with the reliance on and likely future leveraging of an inherently narrow, tourism-based revenue stream that is vulnerable to elevated levels of cyclicality.
GOOD COVERAGE: Coverage of the bonds' MADS has improved over the last
several years to a strong 3.1x in 2012, reflecting the strengthening
pledged revenues and absence of new money debt issuance for some time.
PLEDGED REVENUES SUPPORT OPERATIONS: Residual pledged revenues after payment of debt service represent a significant funding source for the authority's operating and capital needs. This reliance creates a practical limitation on future leveraging, in addition to the 1.5x coverage test for additional parity debt.
POSITIVE LONG TERM ECONOMIC PROSPECTS: Recent economic news for New Orleans is generally favorable, as new infrastructure and commercial development projects are accompanied by steadily increasing employment totals and a slowly improving unemployment picture. Overall, prospects appear positive, aided by increasing tourism traffic, population gains and major events scheduled for the next several years.
CONVENTION ATTENDANCE CLIMBING: Attendance at area conventions, including those held at the Morial Convention Center (MCCNO), has steadily improved since Katrina.
AMPLE LIQUIDITY: The authority maintains substantial cash reserves, which while not pledged to the bonds, support pay-as-you-go capital spending and serves as a buffer against unforeseen revenue declines.
DEBT SERVICE COVERAGE: The rating is sensitive to material, sustained shifts in debt service coverage. Fitch expects coverage to remain within a band around current levels despite inherent revenue volatility and future leverage.
The Ernest N. Morial Exhibition Hall Authority is a political subdivision by the state of Louisiana. The authority is governed by a 12-member board of commissioners, of whom nine are appointed by the Louisiana governor and three by the mayor of New Orleans. The authority is legally distinct from the city of New Orleans (GO bonds rated 'A-'/Negative Outlook).
The authority was created by the legislature in 1978 for the purpose of building and operating a convention center in New Orleans. The convention center has undergone several phases of expansion since initial construction and is now the sixth largest in the U.S. The facility is located along the Mississippi River in downtown New Orleans.
STRONGER DEBT SERVICE COVERAGE REFLECTS GROWTH IN TOURISM ACTIVITY
Coverage of MADS by the 2012 pledged revenues is 3.1x, up from the 2.7x coverage provided by 2011 revenues (Dec. 31 fiscal year-end). The improved coverage resulted from significant 13% growth in the basket of tourism-based tax revenues in 2012. The pledged revenues have exhibited a strong 7.9% compound annual growth rate since fiscal 2008, reflecting the resurgence of the tourism sector and related visitor and convention traffic since Hurricane Katrina in 2005. Importantly, tax collections surpassed the pre-Katrina peak for the first time in 2012, climbing to $46.4 million or 112% of 2004 collections.
The authority also has a loan outstanding from the state of Louisiana that is subordinate to the special tax bonds. When considering subordinated debt service, coverage of all-in MADS by 2012 revenues is still strong at 2.6x.
Management budgeted 2013 pledged revenues to improve nominally by 0.6% from 2012 actuals. However, the tax revenues through July 2013 are up 10.1% from the same six-month period in 2012 and management is forecasting total receipts of $48.9 million to conclude the year. If realized, the forecast revenues would cover special tax MADS 3.3x and all-in MADS 2.8x.
Existing pledged revenues stand up well to a stress scenario that replicates the loss of revenue experienced in the aftermath of Hurricane Katrina. A 40% decline in fiscal 2012 pledged revenue would result in 1.85x special tax MADS coverage (pledged revenues fell by 37.8% between fiscal 2004 and 2006).
FUTURE BORROWING PLANS BEING DEVELOPED
At present the authority does not have defined borrowing plans but is in the process of evaluating funding sources for street and utility improvements as well as a possible expansion of the convention center. Capital plans remain subject to funding in partnership with the state, the city, and private developers, as well as legislative approval of any future debt issued by the authority. Authority management expects to better define its cost estimates and capital spending plan over the next several months.
The ABT of 1.5x provides baseline protection for coverage dilution from debt issuance, although the reliance on the pledged revenues for operations more substantially guards against over-issuance. Management does not have internal debt service coverage targets. The degree to which future debt plans affect debt service coverage will be a key rating consideration for Fitch.
NEW ORLEANS ECONOMIC RECOVERY ONGOING
Recovery from the economic downturn and the lingering effects of Katrina is continuing, highlighted by increasing tourism and a growing population. Employment growth in the city has generally been positive the past several years but has recently tapered off. The city's unemployment rate of 9.1% in July 2013 is above the state (7.1%) and national (7.7%) averages. The city's economy is diversified in port activities, financial services, education, healthcare, and tourism.
Several commercial projects in the city have been recently completed or
are underway, including the 2012 re-opening of the 1,200-room Hyatt
Regency hotel and construction on the $1.2 billion LSU-VA medical center
complex. Tourism continues to be a positive economic force, with the
2012 visitor total of 9.0 million representing the highest count since
2003. The city's convention and visitors bureau also reported that
tourism spending in 2012 was a record $6 billion.
The city's estimated 2012 population of nearly 370,000 is more than 80% of the pre-storm total. According to the U.S. Census Bureau, New Orleans is the fastest growing U.S. city of 100,000 population or greater based on nearly 5% growth from 2010 to 2011. Taxable values have continued to grow, although at a slower pace than the rapid gains registered in 2007 and 2008. Values climbed more than 10% in 2007 and jumped nearly 38% in 2008 thanks to citywide reappraisals. The gains from 2010-2013 have been more modest, ranging from 3.5% to 6.5% over this period. The taxable AV for 2013 is $3.1 billion.
LIQUIDITY A CREDIT STRENGTH
The authority's robust liquidity has increased significantly since 2005. Neither the cash reserves nor the non-tax revenues of the authority are pledged to bondholders. However, the availability of cash-on-hand has allowed the authority to paygo fund additional capital needs in lieu of debt issuance. The authority concluded fiscal 2012 with $179 million in unrestricted cash and liquid investments, or 3.9x current liabilities, after investing a portion of cash in a planned facility renovation in fiscal 2012.
Also in fiscal 2012 the state tapped $20 million in authority cash-on-hand to fill a gap in its own fiscal 2012 Medicaid budget. While seemingly one-time in nature, the possibility of a repeat is concerning. The state has reimbursed the authority via capital appropriations in separate $10 million installments, both received in fiscal 2013.
Authority operations, after subsidization by tax revenues, are generally positive. Fiscal 2012 results show a modest net deficit, but bottom-line results would have again been positive if not for the transfer of resources to the state and a non-recurring loss on disposal of assets. Management is projecting positive bottom-line results in 2013.
The number of shows at the MCCNO and attendance levels continue to rise. Attendance by out-of-state residents was 549,000 in 2012, surpassing 2004 pre-Katrina attendance of 524,000. Management notes the recently completed and planned facility improvements are expected to attract additional business to the convention center. These expectations appear reasonable to Fitch given management's track record thus far of attracting new events that are scheduled in the next few years.
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
U.S. Local Government Tax-Supported Rating Criteria