NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the following city of Jacksonville, FL revenue bond rating:
--$99 million capital improvement revenue bonds, series 2012 at 'AA'.
The Rating Outlook has been revised to Stable from Negative.
SECURITY
The capital improvement revenue bonds (CIRBs) are secured by a lien on a 2% convention development tax (CDT) and a 1% professional sports facility tourist development tax (TDT) -- each represent a tax on transient rental accommodations (hotel tax). The bonds are also secured by certain franchise fees, a portion of the local option communication service tax (CST), and a $2 million annual sales tax rebate from the state, distributed through May 2024 for attracting or retaining of professional sports franchises. The bonds are additionally secured by a cash-funded debt service reserve fund, equal to maximum annual debt service (MADS).
KEY RATING DRIVERS
The affirmation of the 'AA' rating reflects the strong debt service coverage, solid revenue growth prospects and expected resilience through a moderate economic downturn scenario. The rating also factors in limited risk to additional leverage of the pledged tax revenues. The Outlook revision reflects a change in expectations for additional leverage and MADS coverage levels.
Satisfactory Coverage: Fiscal 2015 revenues continued to provide sufficient coverage for the rating level when evaluated against the worst year historical loss and the Fitch Analytical Sensitivity Tool (FAST) output of potential revenue loss in a moderate economic downturn. Growth has continued at a strong pace in 2016.
Low Leverage Risk: Bond provisions provide an additional bonds test in which historical revenues must provide 1.35x MADS coverage. The indenture also provides that the lien on the CDT or franchise fee revenues may be released by the city if pledged revenues (excluding the portion to be released) during any 12 consecutive months within the preceding 18 months is equal to 1.5x MADS. Fitch also notes that the annual distribution from the state for professional sports facilities, equal to $2 million or about 10% of revenue or 20% of MADS, terminates in 2024; the bonds mature in 2030. The city does not expect to issue additional parity debt, as it intends to meet future debt-financed capital needs by issuing additional special revenue bonds backed by its budget to covenant and appropriate non-ad valorem revenue.
RATING CAPPED BY CITY Issuer-Default Rating (IDR): Fitch establishes a rating cap on the CIRBs equal to the city's IDR, which is 'AA'/ Stable Outlook. The rating cap reflects Fitch's view that a sizable component of pledged revenues would not be viewed as special revenue under Chapter 9, and would thus be more susceptible to impairment in a bankruptcy situation.
Economic Resource Base: Jacksonville is the most populous city in the northeast region of the state and the center of the Jacksonville Metropolitan Statistical Area. The city benefits from a diverse economy and employment that has expanded at a steady pace, providing sound growth prospects for pledged revenues.
RATING SENSITIVITIES
City IDR: The rating is sensitive to changes in the city's general credit quality as expressed in the IDR.
Material shift in pledged revenue performance: The rating is sensitive to shifts in pledged revenue performance that materially affect expectations for the debt service coverage cushion.
Additional Leverage: The rating assumes limited leverage of pledged revenues, which would support continued high MADS coverage. Borrowing outside of this expectation could pressure the rating.
CREDIT PROFILE
The city's economy is supported by the trade, transportation and utilities sectors, education and healthcare, professional and business services, and leisure and hospitality. The city also benefits from its central location with access to a broad transportation network. The presence of the Jacksonville Port Authority enhances economic growth prospects, providing a strategic gateway for trade on the east coast and access for the military, with the presence of three major naval bases. City unemployment has improved from its recessionary peak reflecting steady employment growth. Current city unemployment is on par with the state average but slightly exceeds the nation. Home values experienced a precipitous decline during the great recession and have since improved in recent years, but still remain below the pre-recession peak. Resident incomes trail the state average due to the city's largely service-based economy.
Pledged Revenues Demonstrate Solid Coverage and Resilience
Fiscal 2015 pledged revenues totaled about $21 million, including $6.5 million of the sport facility tourist development tax, $6.0 million of the convention development tax, $5.4 million of the communication service tax, $2.0 million of the sport facility sales tax rebate and $1.4 million in franchise fees. Coverage of MADS was sound at 2.1x. City projections indicate approximately a 5% growth in pledged revenues for fiscal 2016.
Revenues grew at a 1.5% CAGR for the 10 years through fiscal 2014, below the national GDP and inflation growth levels reflecting the significant impact of the great recession on the Florida economy. Revenues have been on a positive trajectory since 2011 (fiscal 2012), largely driven by a rise in convention development tax and sport facility development tax, which grew by 9% and 11%, respectively, in fiscal 2015 Fitch expects revenue growth to continue at a solid pace going forward.
Based on the pledged revenue history, Fitch's Analytical Sensitivity Tool (FAST) generates roughly a 5% revenue decline in a moderate downturn scenario. The largest decline in historical revenues was equal to 11% from fiscal 2008 to fiscal 2011, reflecting the outsized impact of the great recession on the Florida economy. Pledged revenues have since notably improved with fiscal 2015 revenues exceeding pre-recession levels.
Based on fiscal 2015 revenues and coverage, the structure could tolerate at least a 50% drop before MADS coverage falls to 1.0x. This level of tolerance is equivalent to about 10x of the FAST results and 4x the largest actual revenue decline in the review period. Although these coverage levels would be consistent with a 'aaa' financial resilience assessment under Fitch's rating criteria for dedicated tax bonds, the assessment is tempered by the risk of a release of the CDT or the franchise fee revenues if the city were to meet the 1.5x MADS coverage test. Additionally, the release of annual distribution from the state for professional sports facilities in 2024, before the final maturity of the bonds, presents an additional risk to a reduction in MADS coverage. Fitch expects coverage levels to remain relatively level with the improving economy; the risk of additional leverage is considered to be remote as excess revenues are used to support city operations.
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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