NEW YORK--(BUSINESS WIRE)--Fitch has upgraded the rating on the following revenue bonds of Miami-Dade County, Florida to 'AA' from 'AA-':
--$1.4 billion of outstanding transit system sales surtax revenue bonds, series 2008, 2009A, 2009B, 2010A, 2010B, 2012, and 2015.
Fitch has also affirmed the following ratings:
--$62 million of outstanding public service tax revenue bonds, series 2007A and 2011 at 'AA';
--$381 million of outstanding professional sports franchise facilities tax revenue bonds, series 2009A, 2009B, 2009C, 2009D and 2009E at 'A+'.
The Rating Outlook is Stable.
The Issuer Default Rating (IDR) on Miami-Dade County is 'AA'; for more information see 'Fitch Rates Miami-Dade County, FL's Sub Special Obligation Bonds 'A+'; Outlook Stable', dated June 30, 2016.
SECURITY
Transit system sales surtax (TSSS) - the TSSS revenue bonds are backed by a first lien on revenues from a one-half-cent sales surtax levied countywide, net of an administrative fee and a 20% allocation to cities within the county incorporated at the time the tax was approved.
Public service tax (PST) - the PST revenue bonds are backed by a pledge of the PST levied in the unincorporated areas of the county on the sale of electricity, gas, coal, fuel oil, water service and telecommunication services.
Professional sports franchise facilities tax (PSFFT) - the PSFFT revenue bonds are backed by both a first lien on a 1% PSFFT and a 2% tourist development tax (TDT), on the rental of facilities such as hotels, motels and other transient accommodations countywide (excluding facilities within the municipal limits of the cities of Miami Beach, Bal Harbour and Surfside). In addition, the county has covenanted to budget and appropriate sufficient non-ad valorem (NAV) revenues to make up any deficiency in PSFFT and TDT revenue to pay debt service. The county can be released from the NAV covenant if the PSFFT and TDT equal at least 150% of MADS in each of the preceding two fiscal periods.
KEY RATING DRIVERS
Sales Tax Upgrade: The upgrade of the rating on the transit system sales surtax revenue bonds to 'AA' from 'AA-' reflects the application of Fitch's revised criteria for U.S. state and local governments, released on April 18, 2016, and specifically the enhanced analysis of the pledged revenue stream's resilience to scenario-estimated revenue declines. The rating also considers the pledged revenue streams' solid growth prospects underpinned by the performance expectations for key economic and demographic metrics.
PST Affirmation: The affirmation of the 'AA' rating on the PST revenue bonds reflects the degree of financial resilience of the revenue stream when viewed in the context of the existing debt structure. The coverage cushion associated with the PST is considerably weaker under assumptions for full leverage to the additional bonds test (ABT). However, practical considerations exist that limit the likelihood of this occurrence and support the current rating.
NAV Covenant Critical to PSFFT: The affirmation of the 'A+' rating on the PSFFT revenue bonds reflects the legal provisions pertaining to the county's NAV covenant and risks associated with an aggressively ascending debt service structure resulting in very weak coverage of maximum annual debt service (MADS) from current pledged revenues.
Issuing Entity Exposure: Fitch believes the ratings on the TSSS revenue bonds and the PST revenue bonds are capped by the IDR on the county, as the respective pledged revenues do not constitute special revenues under Chapter 9 of the U.S. Bankruptcy Code. Conversely, the PSFFT pledged revenues, which consist of a tax on hotel and other transient accommodations, are viewed as one of several self-evident special revenues under the code, and therefore the PSFFT bonds could be rated above the county IDR if credit quality warranted.
RATING SENSITIVITIES
County IDR: The ratings on the TSSS and PST revenue bonds are capped by the IDR on Miami-Dade County and are therefore sensitive to factors that might impact the county's general creditworthiness. The PSFFT rating is also sensitive to changes in the county's IDR given the county's NAV covenant to support any pledged revenue deficiencies.
Pledged Revenue Performance: The dedicated tax bond ratings are sensitive to shifts in the broader economy that influence the long-term expectation for the consumption of goods and services that drive pledged revenue performance. Typical cyclical fluctuations are not expected to pressure the ratings.
CREDIT PROFILE
Miami-Dade is the seventh largest county in the U.S. by population and the anchor of the Miami-Fort Lauderdale-West Palm Beach metropolitan statistical area (MSA), the 11th largest economy in the U.S. as measured by gross metro product. Trade and transportation is the leading sector by employment, reflecting the county's position as a gateway for trade with Latin American countries. Miami's tourism and real estate markets retain an international appeal that supports expectations for long-term growth but presents the risk of volatility; other economic weaknesses include a comparatively high incidence of poverty.
Transit System Sales Surtax - Exceptional Resilience to Scenario Declines
Pledged revenues in fiscal 2015 totaled $193.6 million or 1.9x MADS. Fitch's revenue sensitivity and resilience analysis for dedicated tax bonds starts with an estimation of the coverage cushion; the distance between MADS coverage and coverage of 1.0x. MADS coverage is evaluated based on the existing debt structure and an adjusted-MADS figure based on the minimum level of coverage permitted under the terms of the ABT (see below for more details on the legal provisions governing each of the dedicated tax revenue bonds). Fitch estimates TSSS revenue in fiscal 2015 can decline by 47% at current MADS or 33% at the ABT-adjusted MADS before coverage would reach 1.0x.
The estimated coverage cushions are evaluated as a multiple of the scenario-estimated revenue change depicted via Fitch's Analytical Sensitivity Tool (FAST) (a relatively modest 1.9% decline) and the largest actual cumulative decline in the time series of data reviewed by Fitch (a 9.7% reduction from fiscal 2007-2009). Both revenue scenarios return a 'aaa' level of financial resilience, with the coverage cushion under the more conservative ABT-adjusted test measuring 17.5x the FAST estimated revenue decline or 3.4x the largest actual cumulative loss.
Public Service Tax - Limited Issuance Expectations Mitigate Weaker Financial Resilience Results
Pledged revenues in fiscal 2015 totaled $120.6 million or 9.7x MADS. The revenue sensitivity and resilience analysis for the PST bonds yields widely different results when the coverage cushion for existing MADS and the ABT-adjusted MADS are compared. Based on current MADS the coverage cushion for the PST is 14.7x the FAST results (a 6% decline in revenue) or 6.8x the largest actual cumulative decline (a 13.2% reduction from fiscal 2002-2005) - both results comfortably measure to a 'aaa' level of financial resilience.
When measured against the ABT-adjusted MADS the results are more consistent with a 'bbb' financial resilience assessment; however, the weaker results are largely discounted based on Fitch's expectation for limited additional debt. The county plans to sell roughly $10 million in additional bonds in 2017 (or 9% of the total bonds currently outstanding) but does not expect to leverage the revenue stream beyond that. Fitch estimates the PST structure can tolerate a significantly higher level of additional debt within the parameters of the ABT before the financial resilience assessment would decline below the 'aa' category.
Professional Sports Franchise Facilities Tax - Structural Risks Tempered by County Support Provisions
Fiscal 2015 pledged revenue of $37.6 million was equivalent to 4.3x annual debt service (ADS). However, Fitch's analysis of dedicated tax bonds focuses on coverage of MADS which was only 0.5x in fiscal 2015. ADS requirements rise roughly 5.5% per year until reaching a MADS of $71.1 million in 2048. Fitch estimates PSFFT revenue growth of about 2% annually is required in order to cover MADS by 1.0x, which is reasonable given the influence of inflation on pledged revenues over the long term and the continued prominence of Miami-Dade County as one of the world's premier tourist destinations.
Nonetheless the difference in both the dollar amount and time between the current year and MADS is a key credit risk as it creates a higher level of uncertainty with regard to both revenue growth and volatility assumptions. As such Fitch views the county's covenant to budget and appropriate NAV revenue to make up any deficiency in pledged resources as critical to long-term credit quality. The rating also considers a provision in the bond ordinance that provides for the release of the NAV covenant, upon achievement of 1.5x MADS coverage in two successive fiscal years, which Fitch considers unlikely.
Mixed Growth Expectations
Fitch estimates the 10-year revenue CAGR (fiscal 2004-2014) for the TSSS at 3.1%, 0.2% for the PST, and 6.1% for the PST. The TSSS is a general sales and use tax and as such its performance should generally trend in line with changes in the population, employment, and income of the broader Miami-Dade economy. The current trend is very positive with TSSS revenues up 37% from fiscal 2010-2015 and collections through the first nine months of fiscal 2016 a near 5% increase year-over-year. Over time Fitch believes the pace of revenue growth will be somewhat more moderate but remain well above the rate of inflation.
The PST has essentially been flat over the last decade. Fitch believes the performance of this revenue stream will likely remain constrained by shifts toward the use of more efficient home appliances and automobiles and increased conservation awareness that counteract the benefits of growth in the population and utility customers.
The performance of the PSFFT tracks the performance of the Miami-Dade tourism sector which has performed very well overall but is subject to periods of volatility. National and international travelers are drawn by the abundance of leisure and vacation attractions, a broad business community and convention events, cruise ports, and cultural centers, among other factors, located throughout Miami-Dade County. Significant private investment resulting in higher room inventories are another benefit. Fitch believes the PSFFT's growth prospects are strong and are likely to continue to surpass the pace of U.S. economic growth.
Satisfactory Legal Provisions
The ABT for the TSSS revenue bonds and the PSFFT revenue bonds are both based on a 1.5x MADS coverage requirement with the caveat that the test for the PSFFT bonds declines to 1.0x MADS coverage if the county's NAV covenant has been invoked during the computation period. The ABT for the PST revenue bonds requires 1.2x coverage of MADS. The ABT for the PSFFT bonds allows for the MADS coverage requirement to be met based on either historical or projected revenues, which allowed for the very slow payout of principal and steeply ascending debt service structure.
Each respective bond ordinance requires the county to make monthly deposits to the debt service funds created therein. Surplus amounts available after the payment of debt service and other required deposits under the bond ordinances become available for any lawful purpose of the county. The PSFFT and TDT are restricted for various tourism and recreation use, and the TSSS is restricted for road, bridge, bus, and other transit operations, acquisition, and construction. The PST is more broadly available for the general purpose of the county.
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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