Fitch Affirms Ratings on District of Columbia Ballpark Revs; Outlook Stable

NEW YORK--()--Fitch Ratings affirms the District of Columbia's (the district) outstanding ballpark revenue bonds as follows:

--$77.585 million taxable series 2006A-1 at 'BBB+';

--$75.765 million taxable series 2006A-2 at 'BBB+';

--$321.07 million series 2006B-1 bonds at 'A-';

--$21 million series 2006B-2 bonds at 'A-'.

The Rating Outlook is Stable.

SECURITY

Bonds are ultimately secured by the pledged ballpark fee (the fee), a gross receipts fee levied on all businesses in the district with over $5 million in annual gross receipts, as well as various utility taxes levied district wide. Under the trust indenture's covenants, the district's independent chief financial officer (CFO) is statutorily required to annually set the fee at a level that, in combination with other pledged revenues, ensures at least sum sufficient debt service coverage and replenishment of debt service reserves. Series B bonds have a senior interest in the ballpark fee and utility taxes, while series A bonds have a junior interest.

In addition, series A-1 bonds are secured primarily by rent payments from the Washington Nationals Major League Baseball team sized to cover debt service. Series A-2 bonds have a senior interest in certain sales tax revenues generated during baseball events at the stadium, Nationals Park (taxable stadium revenues). Series B bonds have a senior interest in certain other sales tax revenues generated within Nationals Park and from parking during baseball events (tax-exempt stadium revenues).

KEY RATING DRIVERS

BALLPARK FEE LEVIED DISTRICT-WIDE PROVIDES SECURITY: The ratings rest primarily on the security provided for all four series of bonds by the pledged ballpark fee and the covenanted statutory commitment regarding sum sufficient debt service coverage. Ballpark fee revenues alone covered annual debt service just below 1.0x in bond year 2014 (ending Feb. 1 and based on calendar year 2013 collections), and maximum annual debt service (MADS) by 0.66x. Coverage from total pledged revenues was a solid 2.18x annual debt service and an adequate 1.32x MADS.

SERIES B BONDS HAVE A SENIOR CLAIM: Series B bonds have a senior interest in ballpark fee revenues, and Fitch believes this provides notable additional security relative to series A bonds, resulting in the higher rating.

ADDITIONAL BONDHOLDER PROTECTIONS: A ballpark fee stabilization fund containing $20 million provides some cushion in the event that ballpark fee revenues, utility taxes, rent payments, and taxable or tax-exempt stadium revenues (collectively, stadium-related revenues) in any year do not meet expectations. This stabilization fund will only be replenished to the extent that tax revenues exceed amounts needed for debt service. Additionally, each series of bonds has its own debt service reserve fund.

PROJECT-RELATED REVENUES CAN BE INFLUENCED BY TEAM PERFORMANCE: Performance of stadium-related revenues is dependent on the success of the team and stadium. Similarly, taxpayer resistance to paying an increased ballpark fee or utility taxes is possible if the stadium is not successful.

DISTRICT MANAGEMENT AND ECONOMY CONSIDERED SOUND: The rating considers the sound economic growth and solid management of the district, whose general obligation (GO) bonds Fitch rates 'AA-', with a Stable Outlook. The district maintains substantial economic exposure to the federal government. While historically this has been an important source of stability, expected federal deficit reduction reflect the risks of this economic concentration. Fitch anticipates government will remain an essential economic driver for the district, but will likely decline in importance and may no longer serve as a growth engine.

RATING SENSITIVITIES

STABLE ECONOMY AND STATUTORY COMMITMENT: The rating is sensitive to substantial shifts in the district's economic profile which drives the ballpark fee revenues and other pledged revenues, as well as the district's continued statutory commitment to levy the ballpark fee at a level sufficient to cover debt service in the event other pledged revenues fall short.

CREDIT PROFILE

The ratings rest primarily on the security provided for all four series of bonds by the pledged ballpark fee, a gross receipts fee levied on all businesses in the district with over $5 million in annual gross receipts. Series B bonds' senior interest in ballpark fee revenues results in the higher rating relative to series A bonds. Other revenues detailed below are additionally pledged. Under the trust indenture and Ballpark Omnibus Financing and Revenue Act of 2004 (the act), the fee must be adjusted annually if, by Dec. 1, the district's CFO determines that fee revenue would be insufficient, when added to other pledged revenues, to equal $14 million plus any amounts needed to make annual debt service and to replenish the debt service reserve fund in the following fiscal year. A ballpark fee stabilization fund containing $20 million has been funded with excess pledged tax revenues and provides cushion in the event that other pledged revenues do not meet expectations. The rating considers the sound economic growth in the district (GO bonds rated 'AA-' with a Stable Outlook by Fitch).

Fitch cites as a concern the performance of pledged project-related revenues (excluding the ballpark fee) being dependent on the success of the team and stadium. In bond year 2014 (calendar year 2013), stadium-related revenues declined from the prior year and fell short of original projections for the sixth consecutive year. Last year's decline further illustrated the tight correlation between team performance and stadium-related revenues as the Nationals failed to make the playoffs. Other concerns include the potential for resistance by payers of the ballpark fee to a fee increase in the event the team and stadium are not successful.

Under the act, the district's city council imposed various fees and taxes that encompass the pledged revenues securing the bonds. The ballpark fee, taxes on non-residential utility use, the district's 5.75% base sales tax (excluding the surtax noted later) on products and services sold within the stadium during baseball events, 9% of the 10% district tax on food and beverages sold in-stadium during baseball events, the 12% parking tax for baseball events at the stadium, and the 5.75% base sales tax (again, excluding the surtax) on tickets for all stadium events, are all pledged on a senior basis for the series B bonds (the latter four collectively known as the tax-exempt stadium revenues). A 4.25% sales surtax on tickets for stadium events, and on non-food and beverage purchases within the stadium during baseball events (collectively, taxable stadium revenues) are pledged for the series A-2 bonds on a senior basis. Rent from the Washington Nationals secures the series A-1 bonds. The series A-1 and A-2 bonds also have a junior lien on the revenues pledged to the series B bonds.

BALLPARK FEE REVENUES SUBSTANTIAL BUT INCONSISTENT

The ballpark fee was initially set to yield $14 million annually through the levy of between $5,500 and $16,500 per gross receipts taxpayer depending on the business's annual gross receipts. Fee revenues have far outpaced those projections, though the year-over-year (YOY) performance has been unreliable with regular swings between annual gains and losses. On an average annual basis, revenues are up 10.1% between bond years 2007 (the year of issuance) and 2014. In bond year 2014, revenues declined $1.6 million, or 4.9%, to $31.1 million. The district attributes $1.2 million of the decline to fewer penalty and interest payments as more taxpayers paid on time in the prior year. The number of taxpayers increased slightly to 2,000 from 1,955 the prior year indicating growth in economic activity in the district.

LACKLUSTER PERFORMANCE IN OTHER PLEDGED REVENUES

Performance in other pledged revenues (excluding Major League Baseball's [MLB] rent payments) has been tepid and below projections provided at the time of bond issuance in 2006. Utility taxes actually declined 1.7% on an average annual basis between bond years 2007 and 2014. Fitch continues to believe year-to-year stadium-related revenues could be quite volatile, in contrast to the independent projections provided at the time of bond issuance, which forecast steady increases after the new stadium opened in 2008. Tax-exempt and taxable stadium revenues grew at 8.4% and 5.1% annually over those years, but most of the growth came in the stadium's initial season and in bond year 2013 when the team's performance significantly improved and the Nationals reached the postseason, providing three additional games of stadium-related revenue. Stadium-related revenues grew 51.5% in bond year 2013 from the prior year. They declined 4.3% in bond year 2014 when the team's performance faltered and the Nationals missed the playoffs.

SUFFICIENT ADDITIONAL BONDHOLDER PROTECTIONS

Additional bonding is currently statutorily prohibited, as the district issued the full authorization in 2006. The indenture allows for a change in the act to allow for additional bonds as long as coverage on all current and prospective bonds, excluding the series 2006A-1 bonds that are supported by team rental payments, exceeds 1.15x. Fitch views this additional bonds test as relatively weak.

The ballpark fee stabilization fund, fully funded with $20 million as of Dec. 31, 2009, provides some protection against a drop in pledged revenues, but, if drawn upon, would only be replenished to the extent excess pledged revenues are available. Positively, Fitch notes that under local law, beginning in fiscal year 2015 the district will use any excess pledged revenues collected each year to accelerate bond redemption. The district estimates having up to $54 million available at the end of fiscal 2015 for bond redemption with the first call dates in November 2015.

As noted above, the rating is based on the availability of ballpark fee revenues for debt service on all the bonds. Ballpark fee revenues alone provided 0.93x coverage of aggregate series A and B debt service in bond year 2014. To test the resiliency of ballpark fee revenues as the underlying factor supporting the ratings, Fitch calculated the growth rate necessary to provide sum sufficient coverage absent any other pledged revenues. Because of the decline in bond year 2014, this scenario requires 9% growth in bond year 2015, then approximately 1.5% annual growth in ballpark fee revenues to match the escalating debt service schedule. While this is well below the historical 10.1% average annual growth rate, Fitch notes that in the event the stadium were completely unsuccessful (implied by the absence of other pledged revenues), some resistance to continued levying of the ballpark fee could emerge. Fitch views this scenario as very remote given the team's non-relocation agreement and MLB's active role in enforcing that agreement.

Through a series of agreements among the district, the D.C. Sports and Entertainment Commission, which has since been merged with the district's convention center authority to create the Washington Convention and Sports Authority (WCSA), and the team (which had initially been held by MLB and is now privately held), the team leases the stadium from the authority for 30 years. Upon sale of the team in 2006, the private owner assumed all of the obligations under the agreements. As was the case with the commission, the WCSA's CFO reports directly to the district's CFO.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'U.S. Local Government Tax-Supported Rating Criteria', dated Aug. 14, 2012;

--'U.S. State Government Tax-Supported Rating Criteria', dated Aug. 14, 2012.

Applicable Criteria and Related Research:

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

U.S. State Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686033

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=830336

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Contacts

Fitch Ratings
Primary Analyst
Eric Kim, +1 212-908-0241
Director
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Karen Krop, +1 212-908-0661
Senior Director
or
Committee Chairperson
Laura Porter, +1 212-908-0575
Managing Director
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Eric Kim, +1 212-908-0241
Director
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Karen Krop, +1 212-908-0661
Senior Director
or
Committee Chairperson
Laura Porter, +1 212-908-0575
Managing Director
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com