NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'AA' rating on the following bonds of the Fairfax County (the county), VA Economic Development Authority (EDA):
--$229.9 million Fairfax County Economic Development Authority, VA transportation district improvement revenue bonds (Silver Line Phase I Project), series 2012 and 2011.
The series 2012 and 2011 bonds were issued to provide funds to enable the county to meet its obligation to the Metropolitan Washington Airports Authority to fund a portion of the cost of the construction of an 11-mile expansion in Fairfax County (the 'Phase I Dulles Rail Project') of the regional mass transit system of the Washington Metropolitan Area Transit Authority.
The Rating Outlook is Stable.
SECURITY
The bonds are limited obligations of the EDA payable primarily from proceeds of a limited ad valorem property tax (special tax revenues) levied by the county on all taxable property zoned for commercial or industrial use in the Phase I Dulles Transportation Improvement District (TID or district).
The county is not legally obligated to impose the special tax. The obligation to collect and pay to the trustee the special tax revenues is contingent upon the levy and appropriation of such by the county board of supervisors. Bondholders are additionally secured by a cash funded debt service reserve fund which is funded at maximum annual debt service (MADS) of $17.6 million and revenue stabilization fund also funded at MADS.
KEY RATING DRIVERS
HEALTHY COVERAGE PROJECTED: The 'AA' rating reflects appropriation risk and Fitch's expectation that coverage will remain healthy given tax rate flexibility under the statutory ceiling and no plans for future leverage. The county targets debt service coverage of 1.5x. Fitch estimates 2014 coverage at the statutory maximum tax rate at 2.6x MADS.
RESTRICTED USE OF REVENUE: Revenues are restricted to project financing, either through debt service payments, including retirement, or pay-as-you-go capital financing, which mitigates risk of appropriation for uses other than debt service.
HIGH TAXPAYER CONCENTRATION: Risk to taxpayer concentration is of some concern, although Fitch believes ample taxing capacity under the statutory cap mitigates the risk associated with the loss of a prominent property owner(s) and tax base decline. High cash reserves are maintained that could address unanticipated collection loss.
STRONG LINK TO 'AAA' COUNTY GOVERNMENT: Fitch rates the county's general obligation bonds 'AAA' with a Stable Outlook. TID's commission is composed of members of the Fairfax County's Board of Supervisors. The county's superior financial management team oversees the tax levy and collection process, as well as the debt service payments. These factors offset the district's role in requesting the imposition of a sufficient tax rate and the payment of debt service.
STRONG UNDERLYING TAXBASE: The TID contains a significant portion of the county's deep commercial and industrial tax base. Assessed valuation (AV) trends have been historically strong and stand to benefit from metrorail expansion.
RATING SENSITIVITIES
SUFFICIENT REVENUE AVAILABLE FOR DEBT SERVICE: The rating is sensitive to maintenance of adequate coverage which given no legal ability for future leveraging, would likely reflect tax base changes. Given recent assessed value (AV) stability, strong tax collections, strong reserve balances and rate flexibility, Fitch believes such changes are unlikely in the near term.
CREDIT PROFILE
PROJECT OVERVIEW
The TID was created in 2004 to provide $400 million of funding for the first phase of the Dulles Metrorail Project. Metrorail was extended through the commercial heart of Fairfax County and ultimately, in the second phase, beyond Dulles Airport. Phase I construction is complete and rail service began July of 2014.
The TID encompasses approximately 23 miles in length and embodies about one-quarter of the county's commercial and industrial tax base, inclusive of Tysons Corner. The TID includes approximately 36 million square feet of office, commercial, and retail space. Transit oriented development is projected to double the area's available space, spurred by the location of five new metrorail stations within the TID.
The district includes 24 of Fairfax County's top 50 employers including six Fortune 500 companies Booz Allen Hamilton, Freddie Mac, Northrop Grumman, SAIC, Capital One, and Gannett.
SUFFICIENT COVERAGE BASED ON REASONABLE GROWTH ASSUMPTIONS
Projected debt service coverage is adequate at 1.4 times (x)-3.8x throughout the life of the bonds based on a 1.5% assumed rate of assessed value (AV) growth and a tax rate set at the current 21 cents per $100 of AV.
Fitch believes the AV forecast to be reasonably conservative. Since fiscal 1984 AV growth within the current TID boundaries has averaged 4.7% per year. AV growth within the district was exceptionally strong from fiscal years 2005-2009, nearly doubling from $6.8 billion to $12.8 billion. District AV declined in aggregate more than 22% between 2009 and 2011 but has rebounded with growth of 15% between 2012 and 2015.
A strong pipeline of redevelopment activity exists with more than 13.5 million square feet (msf) of office space under construction or approved development. An additional 15.6 million square feet (msf) of residential development is either under construction or has been approved for development. No consideration of growth potential related to redevelopment/rezoning activity is given to the district's AV forecast.
AMPLE TAX CAPACITY
The current tax rate of 21 cents per $100 of AV may be increased up to the statutory cap of 40 cents. At the maximum 40 cent tax rate approximately $46.2 million of special tax revenue could be generated or 2.67x MADS based on fiscal 2015 AV of $11.56 billion and a 99.6% historical collection rate dating back to fiscal 2002.
HIGH TAXPAYER CONCENTRATION
There is a significant concentration among the district's 10 largest taxpayers, which represent 36.1% of assessed valuation, led by Macerich, owner of the Tysons Corner Mall, at 9.8%. Fitch believes this risk is offset by the current level of coverage and tax capacity noted above. Without increasing the current tax rate, the 2015 assessed value (AV) could sustain a 28% loss and maintain 1x MADs coverage. At the 40 cents per $100 of AV statutory cap, AV could decline 62% and 1x MADs coverage would be maintained.
PROJECT AND TRUST AGREEMENT SUMMARY
Under a project agreement among the county, the EDA, and the district, the district agrees to request annually (following the receipt of a certified property valuation) that the county levy and collect from all commercial and industrial properties in the district special tax revenue in an amount sufficient to pay debt service on the bonds.
The county is not obligated to levy the special tax revenue, and the obligation of the county to pay any special tax revenue to the trustee is subject to appropriation. Special tax revenues are restricted to project financing and cannot be applied to any other general government purpose limiting risk to annual appropriation. Special tax revenues are levied, collected, and enforced in the same manner as general county property taxes. There is an acceptable timeframe from AV calculation (January to February) to determination of the tax rate (May 1).
The rate covenant includes a weak 1.2x senior lien debt service requirement, but permits available cash, exclusive of the debt service reserve fund, to account for up to 20% of total revenue in this calculation. There is a similar coverage threshold for additional bonds, but Fitch notes the issuance of any new money debt would require amendment of the project agreement. This practical limitation on additional parity debt somewhat offsets concerns about the weak legal provisions.
The revenue stabilization fund balance is currently 1.1x MADs, although the balance may be released to the residual fund if coverage exceeds 150% for three consecutive fiscal years and the construction of Phase I is complete. The phase I district will be abolished once all debt incurred is paid in full (2031).
ROBUST AND DYNAMIC REGIONAL ECONOMY
Fairfax County's economy continues to perform well, benefiting from its proximity to Washington D.C. and increased federal spending which has insulated the region from the worst of the recession. The county's unemployment rate remains well below the state and nation, at 4.4% as of June 2014, improving from a peak of 5.5% in early 2010. Solid gains have also been reported within the professional and business services, education and health, and leisure and hospitality sectors.
The strong local job market is complemented by one of the more highly educated labor forces in the nation, contributing to median household income two times the national average. The housing market has exhibited signs of price stabilization, and exposure to non-traditional mortgage products is below-average. While expansion of the multi-modal transportation system will help, significant infrastructure needs to alleviate congestion and promote commerce and industry, remain. Management has identified this as a long-term challenge but one that should be somewhat addressed with the completion of the Dulles Metrorail expansion project.
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, Virginia Employment Commission.
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
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=875854
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.