NEW YORK--(BUSINESS WIRE)--Fitch Ratings takes the following rating action on Redevelopment Authority of Allegheny County, PA's (the authority) tax increment revenue bonds:
--$5.2 million outstanding tax increment financing district revenue bonds (Robinson Mall project), series 2000A, affirmed at 'BB+';
--$1.64 million outstanding tax increment financing district revenue bonds (Robinson Mall project), series 2000B, affirmed at 'CCC.'
The Rating Outlook for the series 2000A bonds is Stable. The Rating Outlook for the series 2000B bonds is Negative.
The 2000A bonds are secured by the tax increment revenue derived from the mall properties, excluding the two parcels owned by Sears and J.C. Penney. As additional security, the mall owner has entered into a minimum payment agreement (MPA) pursuant to which it has agreed to make annual payments to the trustee in amounts needed to correct any series 2000A debt service deficiency. The 2000A bonds are additionally secured by a standard cash-funded debt service reserve fund.
The 2000B bonds are secured by tax increment revenue generated on the Sears and J.C. Penney properties and a junior lien on tax increment revenue from the mall properties. Additionally, Sears and J.C. Penney have each entered into a MPA to cover shortfalls in pledged revenues but only up to approximately 50% of debt service.
KEY RATING DRIVERS
SATISFACTORY REASSESSMENT AND TAX RATES: A countywide property reassessment was completed and effective in calendar 2013. Pledged revenues are expected to remain at or above historical levels assuming no decline in tax rates.
WEAK COVERAGE: Coverage of annual debt service from annual tax revenues for the series 2000A bonds remains weak averaging around 1.0x. Sum-sufficient series 2000B bonds debt service coverage is derived from annual MPAs from Sears and J.C. Penney (averaging around 0.55x) and use of accumulated tax increment reserves. Fitch assumes no additional tax revenue from Sears and J.C. Penney while assessment appeals are outstanding. Coverage for either series is not expected to improve thorough final maturity in 2017.
UNRATED OWNER TEMPERS AGREEMENT BENEFIT: An amendment to the original agreement between the authority and the mall owner (Robinson Mall Associates, Ltd.) provides for sufficient revenue to meet series 2000A debt service and limits downside assessment appeal risk. However, the strength of the agreement is tempered by the mall owners' prior challenges to meeting its agreement obligations coupled with the unrated nature of the obligor.
CHANGE IN SEARS IDR: The 'CCC' rating on the series 2000B bonds is based on Fitch's Issuer Default Rating (IDR) and Negative Outlook for Sears. If required payments under the MPAs for Sears and J.C. Penney's were to be insufficient to fully compensate for a shortfall in TIF revenue, the rating would no longer be tied to either company's IDR.
HIGH TAXPAYER CONCENTRATION: Pledged tax increment revenues are generated from a relatively small but fully developed project area dominated by retail tenants highly exposed to general economic conditions and consumer spending patterns.
AVAILABLE BALANCES SUPPORT DEBT: The indenture creates a closed flow of funds; surplus tax increment revenues remain in reserve to support series 2000A debt service shortfalls first, and then flow to series 2000B debt service. A cash-funded debt service reserve for series 2000A bonds is also available and currently totals 70% of debt service.
SOLID ECONOMIC INDICATORS: The economic characteristics of the immediate retail service area are solid with above average income levels and below average unemployment.
TAX RATE ADJUSTMENT RISK: Assessed value on the property is locked through bond maturity following the recent revaluation. Current tax rates would continue to provide sufficient coverage of series 2000A debt service. Any decline in tax rates, while not expected, would impair coverage and could result in negative rating action.
MINIMUM PAYMENT SHORTFALL FOR SERIES 2000B: If Sears and J.C. Penney MPA payments are insufficient to offset a shortfall in TIF revenue, the rating on those bonds would drop. Accumulated reserves are currently available to supplement the MPAs to meet series 2000B debt service.
CHANGE IN IDR OF SEARS OR J.C. PENNEY: A rating on either company below Sears' current 'CCC', Rating Outlook Negative, would likely result in a downgrade of the series 2000B bonds.
CROSS DEFAULT: The indenture includes a cross default provision whereby the trustee or 25% of bondholders may declare all bonds to be due and payable immediately upon a default of either series. Fitch does not believe acceleration is probable as sufficient funds to redeem the bonds are not likely to be immediately available. If Fitch had an indication that this acceleration option was to be invoked, the other series would be downgraded.
The Mall at Robinson opened in fall 2001 in Robinson Township, along a corridor connecting the Pittsburgh International Airport and the downtown business district. The mall has direct interstate access, which helps attract shoppers from a wider trade area than the immediate region.
WEAK COVERAGE BUT SOLID RESERVES
Pledged tax increment revenues received in 2013, the most recent year reported, provided coverage of approximately 1.2x of the essentially level debt service on the 2000A bonds. Coverage is up slightly from the past two years following countywide revaluation in 2013 which resolved pending and reversed past tax appeals. The mall property assessment has been set at $108 million for 2013-2017 which, at the expected adjusted tax rates for 2013, would provide slightly over 1.0x debt service coverage for the series 2000A bonds.
Somewhat offsetting concerns about low coverage levels are the sizable reserves available to first repay series 2000A bonds. In addition to a cash-funded debt service reserve required to be maintained at $1.35 million, the March 2014 balance in the series 2000A TIF account is approximately $1.65 million. Together these balances represent 1.7x debt service.
SATISFACTORY COUNTYWIDE REASSESSMENT AND PLEDGED REVENUE
The county completed a reassessment process that resulted in an average 35% increase in countywide assessed value (AV) and significant increases to Sears, J.C. Penney and other mall properties. The mall AV was negotiated at $108 million for 2013-2017. Given the state of Pennsylvania's Act 146 of 1998 (the 'anti-windfall law'), the county, township, and school district reduced tax rates accordingly.
Revenues for 2013 were sufficient to cover series 2000A debt service at 1.2x. Series 2000B revenues for 2013 were forecasted at the MPA but appear to have come in lower due to missing J.C. Penney tax payments totaling approximately $184,000. The shortfall resulted in series B coverage of 0.39x but combined series A and B coverage was 1.02x using the series A excess for the series B debt. The authority and its consultant are investigating the shortfall to see if it is an accounting error at the municipality level or an actual payment shortfall. The authority will undertake enforcement actions if needed.
HIGH TAXPAYER CONCENTRATION; MPAS PROVIDE LIMITED CREDIT VALUE
Robinson Mall-JCP Associates is responsible for three-quarters of the tax increment revenues. These rely primarily upon lease rental payments from the mall tenants to make tax payments that constitute pledged revenue for the series 2000A bonds (net of taxes on the minimal base year value). The mall owner's MPA provides no enhancement to Fitch's rating because Fitch does not rate the mall owner and the owner violated the MPA during its assessment appeal in 2010. The February 2013 amended agreement sets annual minimum payments at amounts equal to 1.02x debt service and includes a waiver by the mall owner to protest the valuation of the mall parcels unless the resulting assessment exceeds $1.575 million, an amount which is sufficient to meet annual debt service on the series 2000A bonds.
Series 2000B bonds are primarily dependent on tax payments from the Sears and J.C. Penney properties and contributions under each company's MPA. Additional security is provided by a secondary lien on total TIF revenues and accumulated reserves. Both companies have been called upon to make payments under their MPAs, as tax increment revenue is often insufficient for debt service. Fiscal 2011 and 2012 combined tax increment from both companies provided coverage of just 0.54x on series 2000B bonds.
Sears made payments under the MPA for 2007-2011 on a delayed basis and is now late in its 2012 payment, only paying 86% to date. Series 2000B debt service continues to be paid from the companies' MPA payments (55% of fiscal 2014 debt service) and the balance from excess series 2000A TIF revenue and incremental TIF revenue reserve balances. Available accumulated reserve balances totaled $1.6 million at March 31, 2013 are expected to be sufficient to meet series 2000B debt service if Sears and J.C. Penney annual minimum payments are made with zero excess increment.
REGIONAL MALL WITH SOUND SERVICE AREA CHARACTERISTICS
Allegheny County, Montour School District, and the Township of Robinson adopted a tax increment financing plan to provide funding through the issuance of tax increment bonds for the construction of roadways, utility and infrastructure improvements benefiting the mall. The county has had stable to slightly declining population, generally above-average income and educational attainment, and below-average unemployment relative to the state and nation.
The mall's anchor tenants are Macy's (which is not included in the TIF), J.C. Penney, Sears and Dick's Sporting (whose taxes only to the county are included in the TIF). The mall also houses approximately 120 'in-line' retailers and eateries under long-term triple-net leases that generally extend from five to 10 years. The authority reports there are no additional capital needs at the mall that would require immediate debt financing.
In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope.
Additional information is available at 'www.fitchratings.com'.
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