NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns a 'BBB' rating to the following Gary/Chicago International Airport Authority, Indiana (the authority) bonds:
--$29.9 million airport development zone revenue bonds, series 2014.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by tax increment revenues generated within the airport development zone (ADZ). The bonds are also secured by a cash-funded debt service reserve fund and a supplemental reserve that will be funded over the course of three years and can be released if certain coverage targets are achieved.
KEY RATING DRIVERS
ESTABLISHED TAX BASE: The ADZ has a significant number of existing businesses that provide adequate incremental assessed value to support debt service on the bonds. Taxpayer concentration is high, as typical for a tax increment district.
LIMITED TAX INCREMENT FLUCTUATION: State statutes including the circuit breaker and tax neutralization limit potential revenue volatility.
VERY WEAK UNDERLYING ECONOMY: Declining population, low wealth levels and high unemployment characterize the city of Gary. The ADZ benefits from its proximity to Chicago and major transportation lines.
WEAK COLLECTIONS: Tax collection rates have varied but generally have been below average. Fitch believes the collection rate factored into projections is fairly conservative.
FURTHER POTENTIAL DEVELOPMENT: Completion of construction at the airport combined with active economic development efforts could stimulate growth in the ADZ. This activity and its possible positive impact on debt service coverage are not assumed in the rating.
ADEQUATE LEGAL PROVISONS & COVERAGE: The additional bonds test is adequate, and the debt service reserve fund is cash-funded.
RATING SENSITIVITIES
COLLECTION VARIANCES: This rating is sensitive to the volatility inherent in the pledged revenue stream, particularly due to weak collections or significant appeal levels.
TIF NEUTRALIZATION CHANGES: Changes to Indiana's TIF neutralization legislation could remove one of the key downside mitigants and materially weaken the rating. No change is currently expected.
CREDIT PROFILE
The ADZ encompasses 4,155 acres along the western limits of Gary, including the city's airport, approximately 30 miles from Chicago.
WELL-ESTABLISHED ADZ AND TIF NEUTRALIZATION PROVIDE STABILITY
The base assessment date for the TIF is March 1, 2004. Captured assessment was $21.6 million in the first year and was $112 million in the most recent year. The base assessment is $24 million. The net tax increment has been limited since 2010 by Indiana's circuit breaker law, which restricts the tax rate to 1%, 2% or 3%, depending on the type of property. Net tax increment for the current year is $4.9 million. No properties can be removed from the ADZ if the removal impairs the TIF revenues.
Projections assume flat revenues from current year projections after decreases built in through 2019 to account for declines in taxes from the roll off of existing debt that is exempt from circuit breaker limitations. The net tax increment should stay roughly flat as Indiana has TIF neutralization laws that adjust the base assessment to preserve the captured assessment should there be a decline in assessed value. Should the base assessment be reduced to zero, the value of the TIF neutralization laws is eliminated, but the base assessment for the district is currently $24 million, so this risk is modest. Fitch believes that the protections offered by the TIF neutralization law are an important factor in maintaining the current rating level.
Though TIF neutralization partly mitigates one of the largest risks, there are several other key risks to the TIF revenue available for debt service. Tax appeals supercede TIF neutralization, so large appeals could reduce the amount collected. Revenues declined about 8% from 2012 to 2013 largely due to successful appeals following the 2012 reassessment. Similarly, poor collections could limit available revenues. Bonds were structured with an 85.68% collection rate, the average collection rate for the authority from 2009 to 2013, though this was during the implementation of the circuit breaker so might not be representative. The average collection rate from 2000 through 2013 was over 92%.
Gary's home county, Lake County, recently implemented a local option income tax (LOIT). The income tax is collected and then used to offset a property tax rebate to taxpayers. The LOIT will be applicable to repayment of the bonds through 2019, and, unlike property tax revenues, is not subject to property tax collection risk. The LOIT is distributed every six months and the first amount distributed to the ADZ was $413,000.
WEAK ECONOMIC BASE
The overall economy for Gary is very weak and continues to deteriorate. The population declined 22% from the 2000 census to 2010. The poverty rate of 37.4% is more than double the state and national averages, and the median household income is 56% of the state level and 51% of the national average. Unemployment as of August 2014 is a very high 11%. The city historically benefitted from a large presence from US Steel, which now maintains operations in Gary on a much smaller scale. Gary is a transit hub, with several major roads and railroads converging, in addition to the presence of Lake Michigan on its northern border. Much of this transit activity is in or near the ADZ.
TIF REVENUE SUPPORTS AIRPORT EXPANSION
The proceeds from the bonds will be used to complete a $174 million project to extend the runway at Gary/Chicago International Airport. The project is currently approximately 2/3 complete and should be finished by June 2015. The extended runway will allow the airport to accommodate larger, wide-bodied jets, and will be longer than the runways at nearby Midway airport. This could stimulate additional air traffic, though management is not planning to compete with Chicago airports for passenger traffic. There is some environmental risk for the completion of the runway, but contingencies have been built into project budgets.
The authority has also entered into a 40 year agreement with a private development company to develop properties around the airport. The agreement includes investment milestones, totaling over $100 million over 40 years, and the failure to achieve these milestones would result in the early termination of the agreement. The developer has financial incentives to meet their milestones. A similar agreement has been reached with a company to operate the airport, with incentives provided for improvements.
The ADZ consists of a mix of industrial, commercial and residential properties. The top 10 taxpayers make up an elevated 19% of the total captured assessment. While this concentration is high for a tax-supported government, it is more typical for a tax increment district. Approximately half of the net assessed value is from residential property, and 30% is from industrial. Residential assessed value increased by approximately 2% per from 2008 to 2012 then declined by 8.5% in 2013, largely from a reassessment.
Industrial properties are centered in four areas: metals-related manufacturing; transportation, distribution and logistics; wholesale trade; and construction and specialty trade contractors. Assessed values for industrial properties have been consistently declining, but are likely to benefit from upcoming development efforts, as are commercial properties. The primary commercial properties in the ADZ are a shopping center and a large truck stop immediately off a busy interstate.
ADEQUATE BOND COVENANTS & COVERAGE
The bonds are structured with a 20-year amortization and level 1.67x coverage. Revenues are projected to decline through 2019 as certain taxes phase out, then are flat for the remainder of the life of the bonds. No benefit from potential development near the airport is projected, but neither are changes in collection rates or appeal activity. As a result of this coverage, revenues could withstand a 40% decline before coverage falls below 1.0x. The additional bonds test is satisfactory at 1.5x revenues for any 12 of the prior 18 months and for each future year including new bonds.
The bonds are secured by two reserve funds. The debt service reserve is cash funded based on the IRS test. Additionally, there is a supplemental reserve fund that will be cash funded. It will grow from one third of maximum annual debt service (MADS) for the bond year beginning Feb. 1, 2016 to two thirds MADS for the bond year beginning Feb. 1, 2017 to MADS for the bond year beginning Feb. 1, 2018. The supplemental reserve will be funded using TIF proceeds not used for debt service. Beginning on Feb. 1, 2020, the supplemental reserve can be released if coverage of MADS has been 1.5x for three consecutive years. It does not have to be reinstated should coverage later fall below this level. Fitch believes this reserve provides little value to credit quality since it could be sprung early in the life of the bonds.
Bond principal and interest has first priority on TIF revenues, followed by replenishment of the debt service reserve fund, then the supplemental reserve fund. Taxes are collected twice a year. The boundaries of the ADZ cannot be reduced if such reduction would lower revenues to the TIF.
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, and the 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
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=920575
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