Fitch Rates Reedy Creek Improvement District (FL) Ad Valorem Tax Bonds 'AA-'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned an 'AA-' rating to the following Reedy Creek Improvement District, Florida bonds:

--$164,435,000 ad valorem tax bonds, series 2016A.

The bonds are scheduled for sale on a negotiated basis during the week of June 20. Proceeds of the series 2016 bonds will fund construction of transportation and other improvements within the district.

In addition, Fitch has affirmed the district's Long-Term Issuer Default Rating (IDR) and the rating on the following bonds at 'AA-':

--$421.7 million outstanding ad valorem tax bonds.

The Rating Outlook is Stable

SECURITY

The ad valorem tax bonds are payable from a levy of a direct annual tax on all taxable property within the district, not to exceed 30 mills.

KEY RATING DRIVERS

The 'AA-' IDR reflects the district's strong operating performance supported by prudent management practices and enhanced by substantial revenue-raising capabilities. These strengths serve to mitigate the district's elevated debt levels and limited expenditure flexibility. The extensive concentration in Disney as the primary landowner and beneficiary of district services is balanced by Disney World's long-standing position as one of the world's premier tourist destinations and the essential services which the district provides to Disney World's operations.

The 'AA-' rating on the ad valorem tax bonds is the same as the district's IDR, reflecting the very wide taxing margin afforded the district under its 30-mill property tax cap allowing for more than ample revenue generation.

Economic Resource Base

The district encompasses 25,000 acres of land (about 40 square miles) of which approximately 19,000 are located in Orange County and 6,000 are within Osceola County. About two-thirds of the land within the district is owned by the Walt Disney Company or its wholly owned subsidiaries, while 29% belongs to the district and the remaining 4% is split between the state and other entities. A five-member board of supervisors elected by landowners governs the district. Disney by virtue of its majority ownership of district land determines the composition of the board, which allows for a close working relationship but could potentially threaten the board's independence.

The tax base is highly concentrated, dominated by Disney (Fitch IDR of 'A'/ Stable) and its related subsidiaries which accounted for approximately 85% of the $8.3 billion fiscal 2015 tax base. Disney has comprised at least 80% of district taxable values throughout the district's almost 50-year existence. Due to this concentration, changes in the credit profile of Disney could result in changes to the district's ad valorem tax bond rating.

Revenue Framework: 'aaa' factor assessment

District revenues are expected to grow at a strong pace as large and ongoing investments by Disney in Disney World come on to the tax rolls. Management has considerable revenue-raising flexibility within the 30-mill limit.

Expenditure Framework: 'a' factor assessment

Expenditure flexibility is limited due to elevated carrying costs for debt service and significant public safety spending. Expenditures are likely to grow at a rate generally in line with revenues over time.

Long-Term Liability Burden: 'a' factor assessment

Combined debt and unfunded pension liabilities are somewhat elevated but manageable, even with significant planned issuance of debt in 2017. The district's long-term liability burden is almost entirely due to direct and overlapping debt, as pension liabilities are modest.

Operating Performance: 'aaa' factor assessment

District management has been proactive in raising tax rates to offset tax base losses when needed, consistently generating balanced or surplus operations. Fitch expects that the district will continue to utilize its expanding tax base and considerable revenue flexibility to maintain sizable reserves going forward, leaving it well positioned to maintain strong operating performance throughout the economic cycle.

RATING SENSITIVITIES

FINANCIAL MANAGEMENT: The rating assumes the district's continued maintenance of solid reserves and willingness to raise revenues as needed to fund expenditure demands.

DISNEY'S CREDIT QUALITY: Given the concentration of Disney in the district's tax base, changes in Disney's rating could affect the district's rating.

CREDIT PROFILE

Reedy Creek Improvement District was created in 1967 by a special act of the state legislature for the purpose of supporting and administering certain aspects of the development of the Walt Disney World Resort (Disney World), which opened in 1971. The district provides essential utility, roadway, and emergency services to all properties within its boundaries.

The enabling legislation gives the district a wide range of governmental powers generally reserved for cities and counties including the ability to issue debt, exercise eminent domain, create land use and building codes, develop and maintain its own infrastructure, and levy taxes.

Fitch's concern regarding the dominant presence of Disney and the cyclical tourist sector are mitigated by Disney World's long-standing record as one of the world's top tourist destinations and the general resilience of theme park performance both during and after the recession. Disney continues to make substantial investments in Disney World, including a large expansion of Disney Springs (Downtown Disney), construction of Star Wars Land and Toy Story expansion at Hollywood Studios and the largest expansion of Animal Kingdom with the building of Pandora - The World of AVATAR.

Revenue Framework

Property taxes levied by the district are the primary revenue source composing over 90% of fiscal 2015 general fund revenues and 98% of revenues in the debt service fund. The district is permitted to levy an ad valorem tax up to 30 mills to pay principal and interest on any ad valorem bonds as well as fund operations. The current millage rate uses less than half of the maximum rate, allowing for the potential to generate significant additional revenues. In addition, the district has the ability to impose up to an additional 10 mills for maintenance as well as a 10% utility tax, potential revenue sources which the district has not needed to utilize.

General fund revenues have exhibited strong growth over the past 10 years in excess of both national GDP and CPI. The vigorous revenue expansion is expected to continue given the extensive investments Disney is making to Disney World which will continue to boost taxable values. It should be noted that during the Great Recession, district taxable values declined by a total of only 7%, a fraction of the decline experienced by most Florida local governments. Fiscal 2016 taxable values are well above the pre-recession peak. Fitch expects that taxable values and revenues will continue to grow faster than national GDP and inflation.

The Walt Disney World Company and related organizations represent about 85% of the district's fiscal 2016 tax base. This is down from 89% concentration from the prior six years. However, Fitch believes it is unlikely that Disney's share of the tax base will fall below 80% in the foreseeable future. Furthermore, most of the properties within the district that are not owned by Disney are businesses, such as hotels, that cater to customers of Disney World.

Expenditure Framework

The two major spending items of the district are debt service and public safety. Public safety consists of firefighting services and emergency management services provided throughout the district's property. Transportation, including road maintenance and repair is another significant cost.

The pace of spending growth is expected to accelerate going forward. The district has substantial debt outstanding augmented by the current offering and additional bonds planned for 2017. This is projected to raise debt service requirements from about $42 million at present to approximately $60 million annually beginning in fiscal 2018 following the planned bond sales. In addition, the building of infrastructure improvements will increase the district's operating and maintenance costs, such as the opening of two new garages. Nevertheless, the heightened spending is not projected to exceed the anticipated rapid pace of revenue expansion.

Because of the limited scope of the district's purposes, carrying costs of combined debt service, pension requirement and other post-employment benefits (OPEB) payments have historically been very high relative to total government spending. While the percentage of carrying costs to spending has declined over the past two fiscal years, the fall-off is almost exclusively due to a steep rise in capital spending which has boosted total governmental expenditures by $140 million between fiscals 2013 and 2015 (157%). Holding capital spending steady with fiscal 2013 levels, fiscal 2015 carrying costs remain elevated, exceeding 35% of government spending.

Long-Term Liability Burden

The district has significant ad valorem-supported debt outstanding totaling $440 million with an additional $350 million of debt planned, including this issue and a proposed issue in fiscal 2017. Principal amortization including the current offering is slow with only 40% of principal amortized within the next 10 years. Debt levels are likely to remain high for the foreseeable future.

District employees participate in the state-run Florida Retirement System (FRS). Because of the modest number of employees, budgeted at 368 in fiscal 2016, the district's share of FRS's net pension liability is only $31 million (0.3% of fiscal 2016 market value). Retiree healthcare benefits have historically been funded on a pay-go basis. However, the district has set aside $9 million for future funding of its small $44 million OPEB liability and plans on establishing an OPEB trust fund in the near future.

Fitch assesses the district's combined debt and pension liability to be an elevated but manageable burden on resources. The district is primarily commercial and the resident population is under 100, making the liabilities as a percentage of personal income metric less meaningful and the liability burden as a percentage of property value (about 10% including this sale but not the 2017 bonds) the more significant metric in this case.

Debt, including overlapping debt, constitutes 98% of the total liability. Debt levels will increase with the issuance of bonds in 2017 but should remain within the moderate range.

The district guarantees $80 million of outstanding Osceola County transportation improvement refunding bonds of 2014. The 2014 bonds represented the second refunding of bonds used to construct the Osceola Parkway and are secured by toll revenues from the project. The guaranty is subordinate to the payment of the district's direct debt.

Since the issuance of the county's bonds, the district has not been required to draw upon its guaranty. To the contrary, excess toll revenues have enabled Osceola County to reimburse the district for debt service on its series 2004A ad valorem tax bonds, the proceeds of which had contributed to the financing of the Parkway. Therefore, Fitch does not include this debt in the district's liability calculation.

Operating Performance

Although the district's revenues can vary considerably from year to year due to a heavily managed tax rate, the sensitivity of the tax base to economic cycles is much more moderate. When the district's taxable value fell by over 7% between fiscals 2009 and 2011, the district raised both its operating tax and debt service tax rates, more than compensating for the tax base loss. In addition, the district trimmed expenditures slightly during that period. The result was general fund operating surpluses in both fiscals 2010 and 2011 with unreserved/unrestricted reserves rising to a robust 28% of expenditures. Fitch expects the district to maintain unrestricted reserves of at least 20% of spending going forward throughout economic cycles.

The district continues to build up reserves following recovery of the tax base. Unrestricted fiscal 2015 general fund balance represented over 40% of spending. While there is no formal fund balance policy, the district's internal target is to maintain sufficient reserves to cover at least two months of spending before property taxes are received. The district's five-year budget projections show a modest deficit for fiscal 2016 followed by generally balanced or surplus operations over the following five years.

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

In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from Lumesis and InvestorTools.

Applicable Criteria

U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=879478

Additional Disclosures

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1005983

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Contacts

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

Contacts

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