Fitch Downgrades Syracuse IDA, NY's PILOT Revenue Bonds to 'A-'; Outlook Revised to Stable

NEW YORK--()--Fitch Ratings has downgraded to 'A-' from 'A+' the following Syracuse Industrial Development Agency (SIDA), NY bonds:

--Approximately $228.1 million PILOT revenue bonds, series 2007A;

--Approximately $95.8 million PILOT revenue bonds (taxable), series 2007B.

The ratings are removed from Rating Watch Negative where they were placed in October 2015 as part of Fitch's review of ratings on bonds secured by revenues generated from highly concentrated retail or commercial center operations. The rating action follows a review of both structural factors and risks associated with single-site commercial mall operations.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by Payments in Lieu of Taxes (PILOTs) on the original or 'legacy' Carousel Center mall payable to SIDA by the Carousel Center Company LP (the 'Carousel owner') pursuant to a PILOT agreement, and interest earnings on the debt service reserves.

KEY RATING DRIVERS

DOWNGRADE INCORPORATES PROJECT RISKS: The downgrade to 'A-' reflects concentration and single-site risk, market risk, high leverage, ascending debt service, and reliance upon interest earnings from the debt service reserve fund to cover debt service. These risks are partially offset by the first lien position of the pledged PILOTs, the possibility of mortgage servicer advances to cover potential interruptions in PILOT payments, and solid mall performance.

PILOT LIEN STATUS: PILOT payments are on parity with all governmental fees and charges, all of which are senior to other payment obligations.

SERVICER A SOURCE OF LIQUIDITY: The mortgage servicer that is required as part of the mortgage securitization of the underlying commercial loan is responsible for providing liquidity, if needed, to cover any shortfalls in PILOT payments until mall operations recover or the PILOT lien is foreclosed.

STRONG TENANCY, OPERATIONS AND MARKET POSITION: With limited competition and easy access, the Carousel Center is the premier shopping destination in the Syracuse, New York region. Mall occupancy rates and sales per square foot are strong.

HIGHLY LEVERAGED RETAIL CENTER: PILOT bonds and commercial debt attached to the legacy mall property aggregate to over $600 million, in excess of the most recent appraisals of the mall property.

RATING SENSITIVITIES

DETERIORATION IN PROJECT ECONOMICS: A material decline in mall operations including occupancy rates and sales per square foot would be of concern, especially if the appraised value of the legacy portion of the mall fell below the outstanding par on the PILOT bonds.

ELIMINATION OF SERVICER ROLE: An unwinding of the commercial loan securitization at the end of the commercial loan term in 2019 that eliminates the servicer role would be considered a negative credit event and likely lead to downward rating movement.

GIC PROVIDER EVENT RISK: A decline in interest earnings available for debt service coverage due to a downgrade or other trigger affecting the GIC provider could pressure the current rating.

CREDIT PROFILE

Opened in 1990 in Syracuse, New York, the original Carousel Center mall is a 1.5 million square foot super-regional shopping center with easy access from Interstate 81, a major north-south road that runs from Tennessee to the Canada/New York border.

The 2007 bonds were issued by SIDA for an expansion project that increased the size of the mall by approximately 850,000 square feet of gross leasable area (GLA), and is fully integrated with the original mall. The expansion opened in November 2011 and at the end of 2015 was approximately 88% leased. The expanded mall has been rebranded to Destiny USA and totals 2.4 million square feet, making it the sixth largest mall in the country. There are no reported plans for additional expansion.

The Carousel owner is a wholly owned subsidiary of the Pyramid Company of Onondaga, which is part of the Pyramid Companies. Pyramid Companies was established in 1969 and has developed malls across the northeast portion of the U.S.

ADEQUATE BONDHOLDER PROTECTIONS

The obligation of the Carousel owner to pay the PILOTs is on par only with governmental charges and fees, all of which are senior to any other payment obligations. The requirement of the Carousel owner to make PILOTs is evidenced by a PILOT note, payable to SIDA. The bonds are further secured by PILOT mortgages granted by SIDA and the Carousel owner, encumbering their interests in the existing mall to the PILOT trustee. The mortgage does not extend to the expansion property. The PILOT mortgages impose a lien analogous to liens imposed by taxing authorities, and provide for similar remedies, i.e., foreclosure of property and tax lien sale, providing a strong incentive to pay.

Mall tenants are contractually obligated to pay the Carousel owner, as additional rent, their pro rata portions of PILOTs, and payment of the PILOTs by the Carousel owner is absolute and unconditional, notwithstanding the inability of the Carousel owner to recover this payment from its tenants. Tenant leases generally have five- to 10-year expirations.

A non-impairment covenant by the city of Syracuse and New York State prohibits the city and state from altering the rights of the issuer to collect PILOTs.

CONCENTRATION AND MARKET RISKS

As a single-site property with one owner the mall is subject to concentration risk. This is partly mitigated by the large number of tenants whose leases include the payment of a proportionate share of the PILOT burden. However, mall performance is also vulnerable to changes in the competitive landscape, including on-line sales. These risks are heightened by the long-term tenor of the bonds, which extend out to 2036.

VERY HIGH LEVERAGE METRICS

The mall is highly levered with over $300 million of PILOT bonds outstanding and a $300 million commercial mortgage loan. Payment of the commercial mortgage loan is subordinate to payment of the PILOTs. It is a credit negative that the total amount of leverage exceeds the last appraised value of the legacy property. The last appraisal on the legacy property was performed in 2014 and was $490 million (down from $550 million in 2006), resulting in a loan to value ratio of 67.7% just on SIDA debt, or 128.9% including commercial loans payable on a subordinate basis. The high leverage limits the mall's operational flexibility going forward.

SUM SUFFICIENT COVERAGE STRUCTURE

Annual debt service is structured on an ascending basis. Debt service on the bonds totals $18.4 million in 2016, eventually increasing to $39.4 million in 2036. In order to service this debt, PILOT payments are scheduled to grow by 4% annually through the final maturity of the bonds. The annual escalation of PILOTs adds pressure upon mall operations.

Furthermore, PILOT payments do not by themselves cover debt service. Earnings on the debt service reserve fund, guaranteed at 3.59% from the Royal Bank of Canada (GIC provider rated 'AA' Outlook Negative by Fitch), are needed for sum sufficient coverage. Given the reliance on earnings under the GIC to cover debt service, any event related to the GIC provider that could potentially reduce or interrupt investment returns would likely cause a downgrade to the rating.

PRESENCE OF MORTGAGE SERVICER AS A SOURCE OF LIQUIDITY

Fitch views the presence of a mortgage servicer (Wells Fargo & Company, Issuer Default Rating 'AA-'/Outlook Stable) pursuant to the securitization of the underlying mortgage loan on the mall project as a favorable credit factor. Under the pooling and servicing agreement, the mortgage servicer is required to advance funds when necessary to preserve the security of the mortgage loans, including funds to make PILOT payments. The obligation to advance applies as long as the servicer (or special servicer) determines that the advances will be repaid. Servicer advances provide temporary cash flow support should pledged funds prove insufficient to cover all PILOTS until such time that either mall performance recovers or the property is foreclosed. Fitch notes that the project's high leverage may serve to limit servicer advances.

The mortgage loan on the legacy property along with a $130 million mortgage on the expansion project has been securitized as commercial mortgage pass-through certificates. Both loans are interest only and due in June 2019. Fitch expects the mortgage loans will be rolled over or refinanced.

The senior obligation of the PILOTs, on par with property taxes, ensures that support funding and any proceeds from foreclosure will be allocated first to the PILOTs before the excess is utilized for underlying mortgage claims.

STRONG PROPERTY FUNDAMENTALS

Mall operations continue to be solidly supported by the dominant market position of the mall and the broad geographic area from which mall customers are derived. Occupancy rates and sales per square foot for the legacy mall are 94% and $574, respectively.

The mall is anchored by nationally recognized stores including Macy's, J.C. Penney, Lord & Taylor, Sports Authority, Best Buy and a Regal Carousel Movie Theater. Bon Ton, a former anchor, exited the mall in February 2016 and mall operators are in the process of discussing renting the space to other interested parties.

With approximately 23 million in annual customer visits, the mall is the dominant shopping center in the area and draws shoppers from Canada. According to management data and credit card reports, approximately 10 - 15% of 2015 sales were from Canadian shoppers.

Additional information is available at 'www.fitchratings.com'

Fitch recently published exposure drafts of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015 and Exposure Draft: Incorporating Enhanced Recovery Prospects into U.S. Local Tax-Supported Ratings, dated Feb. 2, 2016). The drafts include a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to less than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published in the second quarter of 2016. Once approved, the criteria will be applied immediately to any new issue and surveillance rating review. Fitch anticipates the criteria to be applied to all ratings that fall under the criteria within a 12-month period from the final approval date.

In addition to the sources of information identified in Fitch's applicable criteria specified below, this action was informed by information from CreditScope, Lumesis, IHS, and Zillow Group.

Applicable Criteria

Exposure Draft: Incorporating Enhanced Recovery Prospects into US Local Tax-Supported Ratings (pub. 02 Feb 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=875108

Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869942

Tax-Supported Rating Criteria (pub. 14 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosures

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https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1001989

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1001989

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https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Larry Levitz, +1-212-908-9174
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Michael Rinaldi, +1-212-908-0833
Senior Director
or
Committee Chairperson
Laura Porter, +1-212-908-0575
Managing Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Larry Levitz, +1-212-908-9174
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Michael Rinaldi, +1-212-908-0833
Senior Director
or
Committee Chairperson
Laura Porter, +1-212-908-0575
Managing Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com