AUSTIN, Texas--(BUSINESS WIRE)--Fitch Ratings upgrades the following ratings on Corpus Christi Business and Job Development Corporation, Texas sales tax revenue bonds:
--$26.7 million sales tax revenue bonds (arena project) upgraded to 'AA' from 'AA-';
--$25.6 million sales tax revenue bonds (seawall project) upgraded to 'AA' from 'AA-'.
In addition, Fitch affirms the 'AA' rating on approximately $4.1 million outstanding sales tax revenue bonds (baseball stadium project).
The Rating Outlook is Stable.
Fitch currently rates the city of Corpus Christi Issuer Default Rating (IDR), general improvement bonds, and combination tax and limited pledge revenue certificates of obligation 'AA'.
SECURITY
The sales tax revenue bonds are payable from first liens on separate voter-approved, dedicated 1/8 of 1% sales tax levies for baseball stadium, arena, and seawall projects.
Economic Resource Base
Situated on the Gulf Coast, Corpus Christi is the eighth largest city in Texas and serves as the regional economic hub for a 12-county area. The city's 2015 population is estimated at 325,477. Prominent industries include petrochemical companies, refineries, associated oil/gas support services, and shipping/port activity. Tourism, military, and higher education are also major employment sectors.
KEY RATING DRIVERS
The upgrade to 'AA' of the arena project and seawall project bonds reflects application of Fitch's revised criteria for U.S. state and local governments, which was released on April 18, 2016. The bonds benefit from the solid growth prospects of the pledged revenues, ample resilience to revenue loss under scenario declines and worst historical performance, and limited plans for additional leveraging.
Dedicated Revenue Stream Growth Prospects
Despite current year declines in pledged revenues due to the contraction of the energy sector the prospects for renewed solid growth are strong given moderate population growth and numerous large investments within the city's industrial sector.
Revenue Stream Sensitivity
Maximum annual debt service (MADS) coverage of the three sales tax revenue bonds is ample and able to withstand considerable revenue volatility. The analysis is based on current MADS as no additional leveraging of the pledged revenues is planned.
Ratings Capped By IDR: The sales tax revenue bond ratings are capped at the city's IDR as Fitch does not view the pledged sales taxes as special revenues.
RATING SENSITIVITIES
Stable Coverage: Large and sustained declines in pledged revenues or substantial unanticipated additional leveraging will lead to negative rating pressure.
CREDIT PROFILE
Revenue Stream Analytical Conclusion
The baseball stadium, arena, and seawall project bonds are payable from first liens on separate, voter-approved 1/8 of 1% sales taxes. Pledged revenues are in a cyclical downturn due to contraction within the energy sector. After expanding by a compound annual average of 4.8% over the last 10 fiscal years, pledged revenues are down by 9.8% for the first 10 months of fiscal 2016. However, Fitch expects healthy growth to return due to numerous large investments within the city's industrial sector that are underway or planned.
In two separate votes, city residents approved three individual dedicated sales tax levies, equal to 1/8 of 1% each, for tourism projects: a 10,000 seat arena adjacent to the city's existing downtown convention center, seawall improvements along the city's bay front, and a 5,000-seat minor league baseball stadium. All three of the dedicated sales tax levies are levied and collected in the same manner as the city's general purpose 1% sales tax, but are separately accounted for in segregated special revenue funds.
The arena and seawall taxes were approved in 2000 to be levied for 25 years and the stadium tax was approved in 2002 for 15 years, which encompasses the amortization schedule of each associated bond series.
All three indentures allow the use of sales tax revenues for related construction projects not financed with bond proceeds. In addition, the flow of funds for the baseball stadium sales tax bonds provides for the use of up to $500,000 annually for affordable housing purposes but only after payment of debt service and construction fund requirements have been met.
Shared legal requirements among all three bond series include a fairly low additional bonds test of 1.25x MADS although no additional leveraging is planned as all projects have been completed. Additional bonds can only be used to finance improvements related to the original bond projects. Legal provisions for all three sales tax securities include a springing debt service reserve fund (DSRF) required once pledged revenues for each fiscal year fall below 1.35x average annual debt service (AADS) for two consecutive years. In the event that the ratio falls below 1x, the reserve requirement will begin the next fiscal year (relying on surplus sales revenues), which Fitch believes would be of little value under such a pressured scenario.
To evaluate the sensitivity of the dedicated revenue stream to cyclical decline, Fitch considers both the revenue sensitivity results (using the same 1% decline in national GDP scenario that supports assessments in the IDR framework) and the largest decline in revenues over the period covered by the revenue sensitivity analysis. Based on the city's 13-year pledged revenue history (fiscal 2003 was the first full year of collection of all three 1/8th sales taxes), Fitch's analytical sensitivity tool (FAST) generates a 3.5% scenario decline in pledged sales tax revenues. The largest actual cumulative decline in historical revenues is an 8.9% decline in fiscal 2010.
Baseball Stadium Project Bonds
Fiscal 2015 pledged revenues of $7.3 million were essentially flat compared to the prior year and cover baseball stadium project bond MADS by 3.3x. Fitch estimates that the structure could tolerate a large 70% drop in sales tax revenues before MADS coverage reaches 1.0x. The 70% decline is equivalent to 20x the scenario results and 8x the largest actual revenue decline in the review period. Fitch believes that these results are consistent with an 'aaa' level of financial resilience or coverage cushion.
Arena Project Bonds
Fiscal 2015 pledged revenues cover arena project bond MADS by 2.1x. Fitch estimates that the structure could tolerate a large 52% drop in sales tax revenues before MADS coverage reaches 1.0x. The 52% decline is equivalent to 15x the scenario results and 6x the largest actual revenue decline in the review period. Fitch believes that these results are consistent with an 'aaa' level of financial resilience or coverage cushion.
Seawall Project Bonds
Fiscal 2015 pledged revenues cover seawall project bond MADS by 2.6x. Fitch estimates that the structure could tolerate a large 62% drop in sales tax revenues before MADS coverage reaches 1.0x. The 62% decline is equivalent to 18x the scenario results and 7x the largest actual revenue decline in the review period. Fitch believes that these results are consistent with an 'aaa' level of financial resilience or coverage cushion.
Strong Industrial Sector Growth
Numerous major commercial/industrial projects are underway which will capitalize upon the area's traditional strength in the energy sector and associated industries. Noteworthy development includes the Cheniere Energy, Inc. expansion adjacent to the Port of Corpus Christi, an $11 billion liquefied natural gas export terminal under construction that will employ 4,000 construction jobs and 300 permanent jobs. The Tianjin Pipe Company is constructing phase II of its $1 billion steel pipe mill and will employ at least 500 by 2017. A $1 billion ethylene cracking plant is under construction by a joint venture of OxyChem and MexiChem. M&G Resins will soon complete construction of its $900 million plastics factory and will employ 225. LyondellBasell is constructing a $750 million ethylene plant which will be completed in 2017. Voestalpine, an Austrian steel producer, will commence operations of its $700 million iron processing plant in late 2016 and will top out at 147 employees.
The Corpus Christi Army Depot is the largest industrial employer in South Texas and several U.S. Navy installations are also located in the area. Tourism is an important component of the economy, with Padre Island National Seashore and Mustang Island State Park as leading area tourist attractions. Schlitterbahn, a major waterpark operator, opened a $550 million waterpark and resort in summer 2015.
The various large projects are expected to help mitigate the impact of job losses within the nearby Eagle Ford Shale that has seen curtailed exploration and drilling activity due to reduced oil prices. IHS Economics expects regional job growth, personal income, and real gross metro product to outstrip that of the U.S. over the medium term with the greatest growth in the construction, natural resources, mining, and professional and business services sectors.
Issuing Entity Exposure
The ratings on the sales tax bonds are capped at the city's IDR. Fitch does not view the pledged sales taxes as special revenues under section 902(2)(B) of the bankruptcy code, which defines "special excise taxes imposed on particular activities or transactions" as special revenues.
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/site/re/879478
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