NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed Atwater Redevelopment Agency, California's (the agency) tax allocation bonds (TABs) at 'BBB+' as follows:
--$7.5 million TABs, series 1998A and 2007A;
--$1.7 million housing TABs, series 2007B.
The Rating Outlook is Stable.
The non-housing series 1998A and 2007A TABs are payable by gross tax increment within the sole project area, net of the 20% housing set-aside and county administrative fee. The housing TABs are secured by the 20% housing set-aside. The debt service reserve requirement is being met through a surety-funded debt service reserve fund.
KEY RATING DRIVERS
SOUND COVERAGE FROM A LIMITED BASE: Housing and non-housing bond coverage are projected by Fitch at 1.62x maximum annual debt service (MADS) and 1.73x, respectively, for fiscal 2015. Fitch believes this level is consistent with the current rating because of the project area's small size and concentration, despite only moderate tax base volatility.
RECOVERING WEAK ECONOMY: The town is geographically remote with weak employment and income indicators and an economy dominated by agriculture. However, the employment base has registered growth for the last six consecutive years, and construction and permitting activity continues at a modest pace.
ADEQUATE ADMINISTRATIVE PERFORMANCE: The agency appears to be in compliance with material indenture and statutory requirements, and is continuing to segregate tax increment revenues from the city's pooled cash fund.
NO IMPACT FROM ANALYTICAL REFINEMENT: Fitch recently refined its analysis of California TABs and is now considering their liens to be effectively closed and surplus housing revenues to be available to pay non-housing debt service. This action did not result in a material improvement of the TABs' credit risk profile.
TAX BASE PERFORMANCE: Unexpected and material deterioration or sustainable growth of the project area's tax base could result in a negative or positive rating action.
The agency is located in the town of Atwater, about six miles north of Merced in California's Central Valley.
IMPROVING DEBT SERVICE COVERAGE
Fitch estimates fiscal 2015 net revenues of $1.6 million will cover non-housing and housing MADS a solid 1.73x and 1.62x, respectively. Actual coverage levels have exceeded Fitch estimates over the past few years due to one-time revenues related to supplemental property tax assessments. A similar dynamic could boost coverage above Fitch-estimated levels in fiscal 2015, particularly given new development activity noted below.
Fitch estimates assessed value (AV) would need to decline by 34% and 35%, respectively, for MADS coverage to reach 1.0x on the non-housing and housing TABs. This compares quite favorably to the project area's cumulative recessionary AV loss of 5.6%.
Fiscal 2015 AV increased a solid 6.6% due largely to the resolution of past appeals and the completion of new construction in the project area. There are currently no appeals outstanding within the project area and management pointed to some factors that could spur modest additional AV growth over the near term, including expanded investment among top taxpayers and increased demand for residential real estate. A chain restaurant and an insurance office space currently under construction are expected to appear on the tax rolls in fiscal 2017. Residential construction permit activity has remained healthy after recovering from admittedly low recessionary levels.
SMALL, CONCENTRATED PROJECT AREA IN WEAK ECONOMIC ENVIRONMENT
The project area is somewhat small at 840 acres, and contains high concentration levels, with the top 10 taxpayers making up 30% of AV (or 33.5% of incremental value [IV]). The largest taxpayer, Teasdale Quality Foods, constitutes 9% of AV, 11% of IV.
The city was severely affected by the housing-led recession, with unemployment peaking at nearly 20%. The project area's AV fared better than expected, however, as continued industrial development offset rapidly falling residential valuations. As a result, the project area's peak-to trough AV loss was just 5.6%, well out-performing a number of project areas in the Central Valley.
Although the project area's AV held up fairly well through the downturn, other economic indicators are weak. Unemployment is down significantly from its peak, but is still very high at 12.5% as of November 2014, driven by modest employment growth.
As is typical of an agricultural community, income levels are low. Median household income levels are at 69% and 79% of the state and national averages, respectively. Per capita incomes are even lower, suggestive of relatively large family sizes. Educational attainment and poverty rates both lag the state and nation.
SATISFACTORY IMPLEMENTATION OF DISSOLUTION PROCEDURES
Management appears to be implementing RDA dissolution procedures (per AB 1X26) in a satisfactory manner. The agency was issued a Finding of Completion from the California Department of Finance (DOF) and is using administrative procedures approved by DOF to balance its six-month cash flows with the help of a private consultancy.
The agency is continuing to maintain a separate cash account solely for the agency's TAB debt service. The agency formerly commingled its debt service funds in a pooled cash account with the fiscally stressed town of Atwater. Fitch was concerned by the possibility that the town might borrow from the agency for its own general governmental purposes, as it did with some enterprise funds. The agency's continued use of a special reserve and its ongoing commitment to separating the agency's debt service funds is required to maintain the TABs' current credit rating.
ANALYTICAL REFINEMENT CONSIDERS POSITIVE EFFECTS OF DISSOLUTION
On May 1 Fitch refined its California RDA analysis pertaining to the beneficial impact of dissolution legislation (AB 1X 26). Fitch now considers TAB liens to be closed and surplus housing revenues to be available for non-housing TAB debt service. Although Fitch views these factors as positive credit characteristics, they were not sufficiently material to result in a positive rating action.
Fitch formerly excluded positive dissolution factors from consideration, reflecting a conservative approach to a dissolution environment marked by legislative, administrative, and judicial uncertainty. Three-and-a-half years and seven recognized obligation payments schedule (ROPS) cycles have passed since dissolution, during which the factors have benefitted TAB credit quality with no successful legal challenges to date. Although uncertainties remain, Fitch views the continued presence of closed TAB liens and surplus housing revenue availability as more likely than not to remain a feature of California TABs.
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.
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