NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'A+' long-term rating to $300 million in Michigan Finance Authority (MFA) local government loan program (LGLP) revenue bonds, series 2014H (Detroit Regional Convention Facility Authority local project bonds), consisting of:
--$270 million LGLP revenue bonds, series 2014H-1, (Detroit Regional Convention Facility Authority local project bonds);
--$30 million LGLP revenue bonds, series 2014H-2 (taxable), (Detroit Regional Convention Facility Authority local project bonds).
The bonds are scheduled to sell via negotiated sale on Oct. 22, 2014.
The Rating Outlook is Stable.
SECURITY
Limited obligations of Michigan Finance Authority payable only from pledged revenues, notably statewide liquor and certain hotel and cigarette taxes statutorily distributed to the Detroit Regional Convention Facility Authority (DRCFA) and pledged first for repayment of DRCFA obligations. Pledged revenues are subject to annual state appropriation.
KEY RATING DRIVERS
STATEWIDE SPECIAL TAX PLEDGED TO BONDS: The 'A+' rating is derived from the gross pledge and lien on statewide and regional taxes levied first for Detroit's convention center, collected in the state convention facility development fund (CFDF) and transferred directly by the state treasurer to the trustee for bond repayment. Payment to bondholders is subject to annual state legislative appropriation.
NARROW, DISCRETIONARY REVENUES: Fitch considers the three pledged taxes--statewide liquor, a transfer of a portion of statewide cigarette, and a state-imposed regional accommodations tax--to be narrow and discretionary, and the accommodations tax in particular has been subject to severe volatility. However, total collections have generally risen over time and provide ample coverage of the current bonds.
ADEQUATE LIMITS ON FUTURE LEVERAGE: Additional borrowing is limited by a requirement that prior year pledged revenues provide 2.5x annual coverage of maximum annual debt service (MADS), and that liquor taxes alone provide 1.25x coverage. Further borrowing is also limited by a statutory cap which has been reached.
NO DIRECT EXPOSURE TO FACILITY: Proceeds support ongoing capital renovation and expansion at Detroit's convention center, but bondholder repayment is not linked to convention center operations nor to the continued operation of the Detroit Regional Convention Facility Authority, which manages the center.
SEPARATION FROM CITY OF DETROIT: The convention center and the regional authority operating it are legally separate from the City of Detroit and from the bankruptcy proceedings currently underway.
LONGSTANDING STATE SUPPORT: The state has supported the convention center for almost 30 years, and state oversight and involvement has been essential to the convention center's recent turnaround.
RATING SENSITIVITIES
ONGOING COVERAGE BY PLEDGED REVENUES: The rating reflects the narrow and discretionary nature of pledged taxes from which debt service is derived. Severe volatility beyond historical experience could result in a greater separation from the state's general obligation (GO) rating.
LINK TO STATE GO CREDIT QUALITY: The rating is limited by the general credit quality of the state of Michigan as reflected in its 'AA' GO rating given the requirement of annual legislative appropriation of pledged revenues, the statutory authorization for this financing and the state's involvement in the convention center. A drop in the state's GO rating would result in a downgrade.
CREDIT PROFILE
The 'A+' rating on MFA's bonds supporting the Detroit Convention Center (Cobo Center) reflects the security provided by the gross lien on pledged special revenues, subject only to annual legislative appropriations. In Fitch's view, the statewide nature of the pledged taxes, the requirement of annual appropriation for deposit to the CFDF, and the statutory authorization for the gross lien and its distribution directly to the trustee link the credit quality of the bonds to the state of Michigan, rather than to Cobo Center. However, the tax revenues pledged to the bonds are narrow and discretionary and have been subject to volatility, and their application first for a single facility financing warrants greater separation from the GO credit quality of the state (currently rated 'AA,' Outlook Stable) than the one-notch difference typically assigned to state bonds supported by an annual appropriation.
Proceeds of the current sale will be loaned by MFA to the DRCFA, which will use the loan to repay a 2011 borrowing, continue the renovation and expansion of Cobo Center, fund a debt service reserve and fund capitalized interest in fiscal year 2015.
Pledged revenues consist of three tax revenue streams deposited by the state treasurer to the CFDF, subject to state legislative appropriation. These include a liquor tax that is levied statewide, a state-imposed accommodations tax levied only on the three-county Detroit metro area, and a statutory fixed transfer from collections of the statewide cigarette tax deposited to the health and safety fund. Under statute, the accommodations tax sunsets on the earlier of Dec. 31, 2039 or 30 days after repayment of the bonds, and the liquor tax cannot be levied unless the accommodations tax is levied. The state reserves the right to adjust the taxes, although the rates have not been changed since they were first established. Authorization for the borrowing includes statutory non-impairment language.
Under state statute, the treasurer distributes first any amount needed on a monthly basis from the CFDF for DRCFA borrowing, and then for a statutorily-fixed operating subsidy for DRCFA, scheduled to sunset in fiscal 2023. As authorized in statute, bond documents provide for the treasurer to distribute funds for debt service directly to the trustee. Remaining CFDF revenues after meeting statutory obligations are distributed back to Michigan counties.
Collections of pledged revenues reflect broad economic activity statewide, rather than the activities at Cobo Center. Aggregate average growth over the last decade has been modest, with liquor tax growth relatively stable even as accommodations taxes show sharp year-to-year volatility. The 10 year average growth rate of liquor taxes through fiscal year 2013 was 3.7%, while accommodations taxes grew 3.4%. Over that period, liquor tax collections experienced only one decline, with fiscal 2010 collections dropping 0.2%. By contrast, accommodations taxes were very volatile, with fiscal 2008 rising 18.3% and fiscal 2009 falling 18.5%. Collections in fiscal 2013 totaled $79.8 million, of which 25% derived from accommodations tax, 55% from liquor tax, and 20% from the cigarette tax transfer.
Debt service is generally level, with final maturity in fiscal 2039. Fitch calculates that coverage of MADS, in 2018, by total fiscal year (FY) 2013 pledged revenues was 3.58x.
A two-pronged additional bonds test provides protection against overleveraging and takes the volatility of the accommodations tax into account. Prior-year pledged receipts in aggregate must cover debt service by 2.5x, and the prior-year liquor tax portion alone must cover debt service by 1.25x. A separate Michigan statute limits borrowing for convention renovation and expansion to $299 million, exclusive of the costs of borrowing; under this provision, no additional new money borrowing is possible.
Fitch views the DRCFA and the CFDF pledged revenues to have adequate separation from the City of Detroit's bankruptcy proceedings.
As noted, the rating considers the protection afforded to bondholders by the gross pledge of taxes that are assigned to support debt service under Michigan statute. Based on discussions with external counsel, Fitch believes there is a reasonable basis to conclude that the DRCFA itself is an entity qualified to file a voluntary bankruptcy proceeding under Chapter 9 of the U.S. Bankruptcy Code and that the revenues pledged to repay the bonds are 'special revenues' under the provisions of Chapter 9.
Fitch notes that Section 928(b) of the Bankruptcy Code converts a gross pledge in certain circumstances to a net pledge, subject to the payment of necessary operating expenses of the system. However, this provision applies only to the extent the special revenues are derived from system activities. In the case of the DRCFA bonds, the rating considers that the pledged special taxes are not derived from the operations of Cobo Center and thus there is a reasonable argument that the pledged special taxes would not be subject to the netting of operating expenses under 928(b) of the Bankruptcy Code. However, there are no judicial precedents and no legal opinions provided by the issuer to specifically address this question. As a result, if Section 928(b) did apply, and the pledged special taxes were subject to netting, then the rating would be materially lower.
The state has a long track record of involvement with Cobo Center and has been actively involved in its ongoing turnaround. The statewide liquor and regional accommodations taxes have been levied and deposited to the CFDF since 1986. State statute established the DRCFA in 2008, which assumed control of Cobo Center from the City of Detroit in September 2009, the beginning of a sustained effort by the state, the City of Detroit, and surrounding counties to renovate and expand the facility. The DRCFA has logged some notable success since then, with the number of major shows at the facility growing to 15 per year in 2014, from two per year in 2008.
For further information on the State of Michigan's GO rating, please see Fitch's rating action commentary, 'Fitch Rates Michigan's GOs 'AA'; Outlook Stable,' dated June 17, 2014, at www.fitchratings.com.
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, Underwriter, Bond Counsel, State of Michigan, Financial Advisor, and Kutak Rock LLP (provider of independent legal analysis to Fitch)..
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);.
--'U.S. State 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. 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=903474
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