NEW YORK--(BUSINESS WIRE)--Fitch Ratings has upgraded the following bonds for the city of Orlando:
--$174.4 million senior lien tourist development tax (TDT) revenue bonds (sixth cent contract payments) series 2008A to 'BBB-' from 'BB+';
--$32.6 million second lien subordinate TDT revenue bonds (sixth cent contract payments) series 2008B to 'BB' from 'B'.
The Rating Outlook on the series 2008A bonds is revised to Stable from Positive.
The Rating Outlook on the series 2008B bonds is Stable.
SECURITY
The 2008A and 2008B revenue bonds are limited obligations of the city secured by the discrete trust estate, including pledged funds, for each respective series of bonds. The majority of pledged funds consist of 50% of a one cent tax levied county-wide on hotel stays. The hotel tax is collected by the county and remitted to the city according to an interlocal agreement.
Pledged revenues also include a fixed installment payment payable from the remaining half of the one cent tax, and equal to $2.8 million available through 2018. Pledged funds are allocated to each trust estate of the three series of bonds (Fitch does not rate the series 2008C bonds) according to a flow of funds with revenues distributed to each trust estate according to the seniority of the series. Additional security is provided by a dedicated liquidity reserve and debt service reserve fund for each series with each established at 50% of respective maximum annual debt service (MADS) for a total combined reserve for each series of 100% of MADS.
KEY RATING DRIVERS
RATING UPGRADES: The upward rating action on the series 2008A and series 2008B bonds reflects the consistent growth in TDT collections which now exceeds five years which has improved debt service coverage. For the series 2008B bonds, the increased margin of security meaningfully reduces overall default risk.
DIFFERING STRESS TOLERANCES: Repayment of the series 2008A bonds can withstand considerable stress while sharp declines in TDT collections could pressure series B bonds debt service coverage.
VOLATILE REVENUE SOURCE: With a nearly 13% decline in fiscal 2002 and over a 15% drop in fiscal 2009, the TDT remains an economically sensitive and volatile revenue.
PREMIER TOURIST DESTINATION: The city is home to Disney World, a world-class tourist attraction. The strength of the amusement park and other area attractions including Universal Studios has enabled the leisure industry to rebound relatively quickly from downturns.
RESERVE CUSHION: Each series of bonds was issued with a liquidity reserve (LR) equal to 1/2 maximum annual debt service (MADS) and a debt service reserve account (DSRA) equal to 1/2 MADS, with the intention that the cushion could provide sufficient cash flow to compensate against periods of weak revenue performance. While the LR for each series was previously tapped and subsequently replenished, there has never been a draw on either DSRA.
RATING SENSITIVITIES
SUSTAINED TDT GROWTH: Continued TDT growth which further bolsters debt service coverage could lead to positive rating action for the senior lien bonds.
LIMIT ON THE SERIES 2008B RATING: Upward revision of the rating on the series 2008B bonds is limited by provisions which allow ascension of third lien bonds to second lien status based on weak combined coverage of 1.1x MADS.
DECLINE IN TDT REVENUE: A reversal of recent positive trends could lead to coverage at levels inconsistent with even the current low ratings.
CREDIT PROFILE
CONSISTENT TDT GROWTH RAISES COVERAGE
The strong and sustained recovery of TDT revenues is now in its sixth year with few signs of letting up. Since February 2010, TDT collections have increased every month on a year-over-year basis, with just two exceptions. Between fiscals 2010 and 2014, TDT revenues expanded by 41%, and are currently at their historic peak. Following a 7.1% growth spurt in fiscal 2014, fiscal 2015 year-to-date collections through January 2015 are up 13.3%, signaling solid prospects for near term growth.
GROWTH BOOSTS COVERAGE
Growth in pledged revenues has boosted debt service coverage for both the series A and series B bonds. The flow of funds directs the first interest payment in each bond year to be paid across all series while for the second principal and interest payment, senior debt service is paid prior to the second and third liens. As a consequence, debt service requirements are substantially higher for November payment dates. The bonds were structured this way as revenue collections have historically been more robust during the summer months. Both on a historical and projected basis coverage has been narrower for the November dates, and Fitch rates to these lower ratios.
SERIES A BOND COVERAGE
TDT revenues from May through October of 2014 along with excess revenues provided 1.39x debt service coverage for the series 2008A payment on November 1, 2014. Recently, TDT revenues received from November through April have been more than sufficient to cover the May interest-only debt service on all three liens with the excess used to supplement the following November's debt service payment. This excess totaled $1.4 million in 2014, increasing the amount available to pay November debt service by 13%. Fiscal 2014 coverage of the November debt service requirement of 1.39x represents a significant improvement over 2013 coverage of 1.27x. When taking into account TDT revenues and principal and interest requirements for full year 2014, series 2008A debt service coverage increases to 1.51x.
Under the Fitch base case scenario of 3.1% annual growth, equal to the average annual TDT growth since fiscal 2000, TDT revenues would provide full year debt service coverage of at least 1.59x. Even in a severe stress scenario that mirrors the largest historical revenue declines of 2001 and 2002, followed by baseline growth, only a negligible amount of reserves would be required to augment pledged revenues.
COMBINED COVERAGE
For combined series 2008A and subordinate series 2008B debt service, TDT receipts provided modest debt service coverage of 1.20x of the November, 2014 principal and interest requirements. This compares favorably with prior year coverage of 1.12x. May through October TDT revenues increased by 8.3% over the comparable period in 2013, partially offset by higher series 2008B debt service. Under the Fitch base case scenario, TDT coverage of full year debt service for both series combined would range from 1.25x - 1.43x through final maturity in 2020. Repayment of series A and B debt service could tolerate only very modest stress in order to maintain 1.0x coverage
HISTORICAL GROWTH MARRED BY PERIODS OF SHARP DECLINES
Historical TDT revenues experienced robust growth, increasing at an average annual rate of 12.7% from 1979 to 2000. During the past decade, however, the TDT suffered several declines falling 12.6% in fiscal 2002 and, following a robust recovery, 15.4% in fiscal 2009. The recent volatility of the revenue stream underscores the economically sensitive nature of the TDT and its dependence upon the local tourist sector.
Some revenue stability is provided by an annual installment payment equal to $2.8 million to be received monthly through Nov. 15, 2018. In fiscal 2014, the installment payments represented close to 15% of pledged revenues.
CASH RESERVES OFFSET TDT VOLATILITY
The liquidity reserves for each series were established to compensate for expected fluctuations in TDT collections. Reserves for both the series 2008A and 2008B bonds have been tapped but fully replenished; the series 2008B liquidity reserve refilled from unused bond proceeds. The DSRA has never been utilized for either series of bonds.
ADEQUATE BONDHOLDER PROTECTIONS
Legal provisions include a cross-default provision. Upon default of the series 2008C bonds, the flow of funds directs payment of principal and interest to the holders of the series 2008A bonds and subsequently to the owners of the 2008B bonds, prior to any payments to third lien bondholders.
Fitch believes a cross-default is possible during the life of the bonds, given that pledged revenues remaining after payment of the prior lien bonds narrowly cover series 2008C debt service requirements. Following a series of drawdowns, the series 2008C liquidity reserve is currently depleted and $1.7 million of the $4.4 million series 2008C DSRA has been tapped. Even a modest downturn in TDT collections could lead to a series 2008C default.
Additional debt is prohibited under the indenture, except for refundings. Additional bonds for refunding purposes may be issued if, during any consecutive 12 of the previous 25 months, contract revenues equaled at least 1.33x MADS on all senior debt and 1.10x MADS on all senior and second-lien bonds. The calculation excludes installment payment revenues.
The indenture provides for subordinate lien debt to ascend to a higher lien if coverage of combined senior and subordinate lien debt service meets the additional bonds test. Under these provisions, subordinate series 2008B debt service could ascend to parity with the senior bonds if combined debt service coverage meets or exceeds a modest 1.33x and series 2008C third lien debt could be on parity with the series 2008B bonds at a very weak combined coverage of 1.1x. The series 2008B bonds would be eligible for ascension with only minor additional TDT growth while significant expansion of TDT revenues would be required to reach the 1.10x benchmark for series 2008C ascension. The potential for coverage dilution limits future upward rating movement, especially for the series 2008B bonds given the low coverage threshold.
CENTRAL FLORIDA ECONOMY STRENGTHENS
The local economy continues to expand and diversify. Employment levels have increased steadily since 2011 and were up 5.1% in November 2014 on a year over year basis. The city's November 2014 unemployment rate of 5.2% was lower than the state and national rates of 5.6% and 5.5%, respectively.
Taxable values gained 7.5% in fiscal 2015, the second consecutive increase after four years of decline, with about one third of the $1.3 billion growth attributable to new construction. Median January 2015 home values are up 8.8% over the prior year according to Zillow Group signaling future tax base growth.
STRENGTHENED TOURIST SECTOR BOOSTS TDT GROWTH
The leisure and hospitality sector continues to be a major component of the local economy, comprising about 21% of total employment. Disney is the dominant player, employing about 69,000 or over 10% of total county employment. Universal Orlando reports 17,300 employees while SeaWorld of Orlando's workforce consists of approximately 7,000.
Tourism recovered in 2011 and 2012 and remained strong through 2014, buoyed by a strengthened economy, the opening of the expanded Wizarding World of Harry Potter at Universal Studios resort and the ongoing expansion of Fantasyland at DisneyWorld. Beside growing theme park attendance and TDT collections, expanding occupancy and hotel room rates are indicative of the strong recovery within this sector.
Both Disney and Universal are in the process of making substantial investments in their Florida theme parks. Disney is building an Avatar-land exhibit in Animal Kingdom as well as extensive renovations to Downtown Disney. Universal has plans to build a water park, according to city officials and press reports, and a fifth hotel is scheduled to open in 2016. In addition, independent projects planned along International Drive include The Orlando Eye observations wheel, Madame Tussauds Orlando wax museum and Sea Life Orlando Aquarium.
Economic diversification has occurred most notably within the education and health services sectors. A growing biotechnology and life sciences cluster is centered in Lake Nona Medical City, a master planned mixed community within Orlando. Lake Nona is anchored by The University of Central Florida's (UCF) Health Sciences Campus, which is home to its College of Medicine and the Burnett College of Biomedical Sciences, the M.D. Anderson Cancer Center and the Sanford-Burnham Medical Research Institute. Other Lake Nona medical facilities are recently opened Nemours Children's and a new Veteran's Administration hospital.
In addition, UCF's recent announcement of its plans to establish a separate campus in the downtown part of the city would further diversify the economic base. Significant additional residential and commercial development throughout the city points towards ongoing near term growth.
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.
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=980829
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