NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the following bonds for the city of Orlando:
--$178.2 million senior lien tourist development tax (TDT) revenue bonds (sixth cent contract payments) series 2008A at 'BB+';
--$33.1 million second lien subordinate TDT revenue bonds (sixth cent contract payments) series 2008B at 'B'.
The Rating Outlook for the senior lien bonds is Positive.
The Rating Outlook for the second lien subordinate bonds is Stable.
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
POSITIVE OUTLOOK FOR SERIES 2008A BONDS: The Positive Outlook on the series 2008A bonds reflects the consistent growth in TDT collections, which has improved coverage of debt service. However, debt service coverage levels remain modest and some additional growth in TDT revenues is required to cover MADS.
SUBPAR RATING ON SECOND LIEN BONDS: The exceptionally low rating on the series 2008B bonds is based on very thin debt service coverage and inability to withstand significant stress without a default. RECENT TDT VOLATILITY: With a nearly 13% decline in fiscal 2002 and over a 15% drop in fiscal 2009, the TDT remains an economically sensitive and volatile revenue.
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 including Universal Studios has enabled the leisure industry to rebound relatively quickly from downturns.
RESERVE CUSHION: Each series of bonds was issued with a liquidity reserve equal to 1/2 maximum annual debt service (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. There has never been a draw on either DSRA.
BONDHOLDERS PROTECTED UPON CROSS DEFAULT: A default for any of the series results in a modification in the flow of funds which more strictly honors the lien status.
SUSTAINED TDT GROWTH: Continuation of TDT growth to the extent that TDT revenues fully cover MADS under stress scenarios that replicate historical losses could lead to positive rating action for the senior lien bonds.
CAP ON THE SERIES 2008B RATING: Upward revision of the rating on the series 2008B bonds is limited by provisions which allow ascension of third lien bonds to second lien status based on weak combined coverage of 1.1x MADS.
DECLINE IN TDT REVENUE: Conversely, a reversal of recent positive trends could lead to coverage at levels inconsistent with even the current low ratings.
CONSISTENT FOUR YEAR TDT GROWTH
TDT revenues have experienced a strong and sustained recovery which is now in its fifth year. Since February 2010, TDT collections have increased every month on a year over year basis, with three exceptions. Between fiscals 2009 and 2013, TDT revenues expanded by 31%, and now exceed pre-recession levels. Following a 6.7% growth spurt in fiscal 2013, four month fiscal 2014 year-to-date collections through January 2014 are up 5.6%, signaling solid prospects for near term growth.
COVERAGE RATIOS IMPROVE BUT REMAIN THIN
Recovery in TDT collections has improved overall debt service coverage, which remains somewhat light for the series 2008A bonds and thin for combined 2008A and 2008B debt service given the inherent volatility of the TDT.
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. The bonds were structured this way as revenue collections have historically been more robust during the summer months. Both on a historical and projected basis, coverage has been narrower for the November dates, and Fitch rates to these lower ratios.
TDT revenues received by the city from May through October of 2013 provided modestly improved but still slim 1.27x debt service coverage for the series 2008A payment on November, 2013. When taking into account full year 2013 principal and interest requirements, debt service coverage improves to 1.43x. Payment of all series 2008A bonds without a draw on the reserve funds requires negligible TDT growth of .2% over the life of the issue.
Under the Fitch base case scenario of 2.8% annual growth, equal to the average annual growth since fiscal 2000, TDT revenues would provide full year debt service coverage of at least 1.47x. Only in the severe stress scenarios that mirror the large historical revenue declines of the past decade, followed by baseline growth, would a small amount of reserves be required to augment pledged revenues.
For combined series 2008A and subordinate series 2008B debt service, May through October TDT receipts provided narrow debt service coverage of 1.12x of the November, 2013 principal and interest requirement, similar to prior year coverage. A 3.4% year over year increase in May through October TDT revenues was offset by a ramp-up of series 2008B debt service due to the initiation of principal amortization in 2013. Under the Fitch base case scenario, TDT coverage of full year debt service for both series combined would range from 1.26x - 1.35x through final maturity. Fitch stress scenarios described above would result in a default of the series 2008B bonds.
STRENGTHENED TOURIST SECTOR BOOSTS TDT GROWTH
Tourism recovered in 2011 and 2012 and remained strong in 2013, buoyed by pent-up theme park demand, the opening of The Wizarding World of Harry Potter at Universal Studios resort and the expansion of Fantasyland at DisneyWorld. Both Disney and Universal are in the process of making substantial investments in their Florida theme parks. Disney recently opened a new luxury resort and is planning an Avatar-inspired exhibit in Animal Kingdom. Universal has plans in place to build Diagon Alley, an expansion of Harry Potter Wizarding World and is in the process of opening a 1,800 room on-site hotel. Area hotel occupancy and room rates, excluding Disney hotels which are not publicly disclosed, have exhibited solid growth since 2009.
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 several declines falling 12.6% in fiscal 2002 and, following a robust recovery, 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 November 15, 2018. In fiscal 2013, the installment payments equaled 15% of pledged revenues.
CASH RESERVES OFFSET TDT VOLATILITY
The liquidity reserves for each series were established to compensate for expected fluctuations in TDT collections. Reserves for both the series 2008A and 2008B bonds have been tapped, although the 2008A liquidity reserve for the series 2008A was drawn upon in the middle of 2009 to compensate for lower than anticipated capitalized interest earnings. The series 2008B liquidity reserve was utilized due to insufficient TDT growth during the first few years after issuance. Both reserves have been fully replenished; the series 2008B liquidity reserve refilled from unused bond proceeds. The DSRA has never been utilized for either series of bonds.
ADEQUATE BONDHOLDER PROTECTIONS
Legal provisions include a cross-default provision. Upon default of the series 2008C bonds, 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.
Fitch believes a cross-default is moderately likely during the life of the bonds, given the failure of pledged revenues remaining after payment of the prior lien bonds to fully cover series 2008C debt service requirements. Following a series of drawdowns, the series 2008C liquidity reserve is currently depleted and the series 2008C DSRA has been tapped. The series 2008C bonds default in the Fitch base case scenario and in all of the stress tests. Fitch estimates that average annual revenue growth of 4.7% would be required to generate sufficient income to avoid default on the series 2008C. This rate of growth is above TDT trends since 2000 but is consistent with the longer term TDT growth trajectory.
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 continues to expand and diversify. Employment levels have increased steadily since 2011 and were up 2.8% in December 2013 on a year over year basis. The city's December 2013 unemployment rate of 5.3% was lower than the state and national rates of 5.9% and 6.5%, respectively.
Citywide taxable values gained 3.4% in fiscal 2014, the second consecutive increase after three years of decline, attributable to a combination of higher residential values and reduced homestead exemptions. Median January 2014 home values are up 22% over the prior year according to Zillow.com suggesting future tax base growth.
The leisure and hospitality sector continues to be a major component of the local economy, comprising about 21% of total employment. Disney is the dominant player, employing about 53,500 or about 9% of total county employment. Universal Orlando reports 13,000 employees while SeaWorld of Orlando's workforce consists of approximately 7,000. Beside growing theme park attendance and TDT collections, expanding occupancy and hotel room rates are indicative of the strong recovery within this sector.
EXPANDING BIOTECH AND LIFE SCIENCE HUB
Economic diversification has occurred most notably within the education and health services sectors. A growing biotechnology and life sciences cluster is centered in Lake Nona Medical City, a master planned mixed community within Orlando. Lake Nona 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, and the Sanford-Burnham Medical Research Institute. Other Lake Nona medical facilities are recently opened Nemours Children's and a new Veteran's Administration hospital. Significant additional residential and commercial development throughout the city points towards ongoing near term growth.
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