NEW YORK--(BUSINESS WIRE)--Fitch Ratings has taken the following action on Chesterfield Valley Transportation Development District, MO's (the district) bonds:
--$14.665 million series 2006 transportation sales tax revenue bonds affirmed at 'BB'.
The Rating Outlook remains Positive.
The bonds are limited obligations payable solely from the net revenues of a 0.375% tax on retail sales within the district, subject to annual appropriation by the district. The sales tax expires February 2031, five years after the final maturity of the bonds. There is also a cash-funded debt service reserve fund (DSRF) with a $2.03 million funding requirement; the DSRF is currently fully funded.
KEY RATING DRIVERS
RECENT SALES TAX IMPROVEMENT: The sales tax base has noticeably improved with the opening of two sizeable outlet centers within the district in August 2013.
IMPROVING BUT VOLATILE REVENUE: Sales tax collections for 2011, 2012 and 2013 were up considerably versus prior years, reflecting an improved local economy, but inherently remain subject to cyclical volatility.
REVENUE UNDERPERFORMANCE & DSRF RELIANCE: Revenue performance remains consistently below expectations at the time of issuance, triggering an intra-year reliance on the cash funded DSRF for the past four years. Strong revenue performance of late and an expanded base should aid the district in eliminating its dependence on the DSRF over the near term.
BULLET MATURITY & REQUIRED TURBO: Fitch views the debt structure as generally weak with interest-only payment requirements between 2017 and 2025 and a bullet maturity in 2026. In the event excess revenues start flowing, the structure does require early redemption. However, subordinate notes issued in 2012 divert funds from early redemptions that are critical to ultimate payoff.
ACCESSIBLE LOCATION: The district encompasses a five-mile commercially attractive retail corridor along Interstate 64 which caters to the affluent St. Louis County region.
SALES TAX BASE EXPANSION: The expansion of the sales tax revenue base from the recent opening of two outlet malls and further expansion of these malls will likely enhance pledged revenues, debt service coverage and overall credit quality.
ADDITIONAL LEVERAGING OF REVENUE SOURCE: If the district issues more subordinate notes similar to the 2012 notes that delay pre-payment of the 2006 bonds, the district's ability to pay the 2026 maturity will be reduced, creating downward rating pressure.
The district encompasses a sizable 7.43 square mile area located along a five-mile corridor of Interstate-64 in western St. Louis County. As of November 2013, there were 664 retail establishments located within the district.
NEW OUTLET MALLS EXPAND TAX BASE
The district comprises one of the largest concentrations of big box retailers in the region. There is point-of-sale concentration with the top 15 payers in 2012 accounting for 52% of total sales tax collections.
Concentration in the district is expected to materially diversify with the August 2013 opening of two large outlet malls operated by Simon Property Group and Taubman. In the first two months of reported sales from these malls, sales tax revenues were up 34% over the prior year. The Simon-operated mall is adding an additional 80,000 square feet of fully leased space to open in late 2014 to its existing 300,000 square feet, likely further improving revenues.
SALES TAX REBOUND
Sales tax revenues for the first nine months of 2013 increased by a robust 5.9% over same period collections in 2012. This period includes two months of revenues from the new outlet malls. This growth follows a 7.3% increase in 2012 and an 8.5% increase in sales tax revenues in 2011 compared to 2010. Between fiscals 2007 and 2010, sales tax collections in the district fell by nearly 16%. The decline was mostly attributable to the recession but also due partly to a one-month payment lag in 2010, created when the state assumed sales tax collection responsibilities from the city of Chesterfield (the city) in early 2010. In addition, the 2006 issue was structured based on over-optimistic sales tax projections, leading to marginal debt service coverage from the onset.
Sales tax revenues were insufficient to meet debt service requirements as a result of these declines, forcing the district to draw upon the DSRF annually beginning in 2010. Draw-downs totaled $183,000 in 2010, $399,000 in 2011, $404,000 in 2012 and $372,000 in 2013 to cover 11%, 24%, 24% and 22%, respectively, of the larger April principal and interest payments in those years. In all three years, the DSRF requirement was restored before the end of the year as sales taxes were received and deposits were made per the flow of funds. Management is projecting either a minimal draw or no draw in April 2014 and going forward, reflecting improved collections. After 2015, debt service drops significantly until 2026.
WEAK LEGAL PROVISIONS
Fitch views the bond structure as weak with a large bullet maturity in 2026 and interest payments only from 2017 through 2025. In the event revenues exceed debt service requirements, the first $500,000 a year of excess sales tax revenues up to a total of $2 million goes into a future projects account. Excess sales tax revenues beyond those deposited to the future projects account are to be used to redeem the 2026 bullet via a mandatory redemption feature. Pre-payment of the 2026 bullet is critical to its ultimate repayment, as annual revenues are well below the bullet payment.
The bond documents are permissive, allowing for liberal issuance of additional parity and subordinate debt. In late 2012 the district issued $353,000 of subordinate notes that are repaid using funds from the future projects account, which will delay pre-payment of the 2026 bullet. There is no limitation to the amount of similar subordinate bonds that the district can issue, so repayment of the 2026 bullet could be materially impaired, though management states that it is not planning to issue additional similar notes. Management is currently planning to issue about $5.3 million of additional subordinate notes, though there is no debt service on these notes until the 2006 bonds are fully amortized, so they will not delay or impair the repayment of the 2006 bonds. The additional notes are financing road projects in the district.
HEALTHY COVERAGE LEVELS
Assuming sales tax levels for the last 12 months (reflecting two months of outlet mall revenues) and no subsequent growth, Fitch's analyses indicate that pledged revenues and DSRF monies should be more than adequate to cover all debt service requirements assuming no further issuance of subordinate debt, with full payoff in approximately 2022. Under Fitch's stress scenario, sales tax collections could decline by 7.4% annually over the life of the issue and, with remaining DSRF monies, still meet all debt service requirements. The largest revenue decline to date was 7.6% in 2010. Conservatively assuming the first $500,000 a year of excess revenues is diverted to outside projects similar to the subordinate notes, collections could still sustain a 4.2% annual decline and meet all debt service requirements.
WEALTHY, GROWING SERVICE AREA
Wealth levels in the city and county are well above state and national averages, and unemployment rates are below comparable levels for the state and country, rebounding from increases during the recent economic downturn. The county supports a diverse economic base, which includes Monsanto and Washington University.
The city has several major economic development projects underway, highlighted by significant growth at Mercy, a large health care system headquartered in the city, the relocation of the headquarters of Reinsurance Group of America to Chesterfield, and a major expansion by Monsanto. These projects will bring a sizable number of workers to the area, increasing the population of potential shoppers within the district.
The district is managed by a four-member board consisting of representatives of the city and county. The pledged sales tax is subject to annual appropriation by the district. However, non-appropriation is unlikely as the pledged sales tax cannot be used for non-district purposes. Furthermore, if the district fails to adopt a budget in any year, the prior year's budget will remain in effect.
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, Zillow.com, National Association of Realtors.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria', dated Aug. 14, 2012;
--'U.S. Local Government Tax-Supported Rating Criteria', dated Aug. 14, 2012.
Applicable Criteria and Related Research:
U.S. Local Government Tax-Supported Rating Criteria
Tax-Supported Rating Criteria