Fitch Affirms Cape Coral, FL's Utility Assessments at 'BBB+'; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings affirms the following Cape Coral, FL (the city) special assessment bonds at 'BBB+':

--$15.35 million utility improvement assessment bonds (Southwest 2 Area) series 2005;

--$15.69 million utility improvement assessment bonds (Southeast 1 Area), series 2006;

--$41.78 million utility improvement assessment bonds (Southwest 4 Area), series 2007;

--$29.9 million utility improvement assessment bonds (Southwest 5 and Surfside Areas), series 2007;

--$15.14 million wastewater and irrigation water refunding assessment bonds (Southwest 1, Pine Island Road and Southwest 3 Areas), series 2005.

The Rating Outlook is Stable.

SECURITY

The assessment bonds are secured by special assessments levied and collected in the affected area and by a covenant to pay debt service from the city's water and sewer system (the system) net revenues after payment of system senior and subordinate (state loans) obligations. Each series of bonds are also secured by a surety-funded debt service reserve fund.

KEY RATING DRIVERS

BACK-UP PLEDGE: The city's covenant to use net system revenues on a subordinate basis to make up any shortfall in debt service payments on outstanding assessment bonds is a key factor in determining the rating. Assessments alone do not in all cases fully cover debt service.

LIMITED COVERAGE ON SPECIAL ASSESSMENT BONDS: Special assessments are levied in small geographic areas and are structured to provide narrow annual debt service coverage (DSC) on outstanding bonds, leaving little margin for non-collection. Historical collections have been satisfactory in most years. However, certain areas have had to utilize accumulated excess assessment revenues and back-up utility revenues to meet annual debt service (ADS) obligations.

TAX LIEN PROVIDES INCENTIVE: Special assessments are included as a line item on the property tax bill with nonpayment resulting in a property tax lien on parity with those related to ad valorem tax delinquencies.

RATING SENSITIVITIES

UTILITY CREDIT QUALITY: The rating on the special assessment bonds relies heavily on the system's ability to cover shortfalls in special assessments. A change in system credit quality would likely impact the rating on the special assessment bonds.

CREDIT PROFILE

Cape Coral (implied general obligations rated 'AA-'/Outlook Stable) is located on the southwest coast of Florida in Lee County 10 miles south of Fort Myers and 125 miles south of Tampa. The city enjoys over 400 miles of waterways providing access to the Intercoastal Waterway and Gulf of Mexico making it a popular vacation and retiree community.

CITY UTILITY SYSTEM PROVIDES BACKUP SUPPORT

The city's water and sewer system (water and sewer revenue rated 'A'/Outlook Stable) serves over 56,000 accounts located entirely within city limits. Pursuant to a 20-year consumptive use permit issued by the South Florida Water Management District, water supply is drawn from the Upper Floridan Aquifer and is sufficient for the foreseeable future. Treatment capacity for both water and wastewater is well in excess of annual demand.

Fitch's rating on the system's revenue bonds reflects a high debt burden, relatively high rates, expanded capital needs and rebounding economic conditions. The system's cash balances declined significantly in fiscal 2015, dropping to $9 million from $25 million the prior fiscal year. The decrease is attributed to reduced collection of pre-paid assessments and an increase in cash funded capital projects. Fitch calculated DSC on senior and subordinate debt from net system revenues plus capital expansion fees and special assessments totaled 1.5x in fiscal 2015.

LIMITED COVERAGE FROM SPECIAL ASSESSMENT LEVIES

The city levies assessments annually in each area in an amount sufficient to cover ADS. The levy also includes an amount equal to one full percentage point above the interest rate on the relevant series of bonds (the maximum discount allowed for early payment of the tax bill) and the estimated cost of collections. While structured to achieve approximately 1.1x DSC, tax collections have been below 100%, providing even less cushion.

Historical collections have typically been sufficient to meet ADS. However, certain areas have had to utilize accumulated excess assessment revenues or advances from the system when collections have fallen short. In fiscal years 2015, 2013, 2012, and 2011, advances of $45,523, $21,146, $211,560 and $26,195, respectively, of surplus net revenues from the system were transferred to support timely debt service payments for several special assessment areas due to slightly weak tax collections. Also, in fiscal 2014 the city failed to bill for the full amount of the debt service requirement for all special assessment areas resulting in a shortfall that was covered with the use of excess assessment funds, not system revenues.

Special assessments are included as a line item on the property tax bill with non-payment resulting in a property lien on parity with those related to ad valorem tax delinquencies. It is city policy to redeem area bonds from prepaid assessments.

The city has state revolving fund loan obligations which are secured by special assessments from new project areas and a backup pledge of surplus net system revenues. Payments on these loans do not begin until Dec. 15, 2016, but are senior to the back-up pledge for the special assessment debt, although subordinate to the system's senior lien bonds.

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

In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope.

Applicable Criteria

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

U.S. Water and Sewer Revenue Bond Rating Criteria (pub. 03 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869223

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1003719

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1003719

Endorsement Policy

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

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Contacts

Fitch Ratings
Primary Analyst
Teri Wenck, CPA
Director
+1-512-215-3742
Fitch Ratings, Inc.
111 Congress Avenue,
Austin, TX 78701
or
Secondary Analyst
Michael Rinaldi
+1-212-908-0833
or
Committee Chairperson
Doug Scott
Managing Director
+1-512-215-3725
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Teri Wenck, CPA
Director
+1-512-215-3742
Fitch Ratings, Inc.
111 Congress Avenue,
Austin, TX 78701
or
Secondary Analyst
Michael Rinaldi
+1-212-908-0833
or
Committee Chairperson
Doug Scott
Managing Director
+1-512-215-3725
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com