Fitch Rates Brevard County, FL's $49.4 million LOFT Bonds 'A+'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned an 'A+' rating to the following Brevard County, Florida local option fuel tax bonds:

--$49.4 million LOFT refunding revenue bonds, series 2016.

The Rating Outlook is Stable.

Fitch currently rates approximately $48 million of outstanding LOFT revenue bonds, series 2007 'A+'.

The series 2016 bonds are scheduled for competitive sale on November 30. Proceeds will be used to advance refund the outstanding series 2007 bonds for debt service savings.

SECURITY

The LOFT revenue bonds are secured by a six-cent levy per gallon of motor and other fuels sold in the county. Revenues are collected by the state and distributed to each county and its incorporated municipalities based on a distribution formula formalized in an inter-local agreement.

KEY RATING DRIVERS

LOFT Revenue Resilience: The 'A+' rating on the LOFT bonds reflects the strong resilience of existing revenues when measured against both Fitch-modeled and historical actual revenue losses.

Negligible Growth from Narrow Revenue Stream: Fitch believes LOFT revenue growth will remain modest based on the county's slowly growing population and employment and trends toward fuel efficiency and conservation, among other factors. The relatively narrow nature of the revenue stream is considered an additional offset to the LOFT revenue resilience.

Low Leverage Risk: The rating also reflects a low expectation for additional LOFT issuance based on reported issuance plans and capital needs of the county. LOFT revenues in excess of debt service are used to fund pay-as-you-go road projects.

Issuing Entity Exposure: Special excise taxes on particular activities, such as hotel taxes (including the gas taxes), are considered by Fitch to be one of four self-evident types of special revenues defined under section 902(2) of the bankruptcy code and would not be capped by the county's IDR.

RATING SENSITIVITIES

Shift in Financial Resilience: The rating on the LOFT revenue bonds is sensitive to maintenance of a sound coverage cushion against cyclical downturns and therefore changes in pledged revenue performance and/or the incurrence of additional new money parity indebtedness, which Fitch does not anticipate.

CREDIT PROFILE

The county's economy was hit hard by the recession with employment falling by over 8% between 2006 and 2010 and unemployment rates topping 11% in 2011. Since 2011, economic activity has generally recovered but employment growth has been tepid, averaging 0.6% growth between 2010 and 2015. Factors which have hindered gains in employment include termination of the space shuttle in 2011, federal sequestration in 2013 and cutbacks in personnel in the county's schools, the largest employer. Unemployment rates have gradually declined since the 2011 peak and the May 2016 rate of 4.7% equaled those of the state and nation.

Housing values declined by over 50% between mid-2006 and January 2012 according to the Zillow Group. Values have slowly risen since and were up 9.7% over the past 12 months but remain well below the pre-recession peak. Zillow projects a 4.5% increase in home values over the next year. The housing recovery has boosted the county's mostly residential tax base with steady growth since fiscal 2013.

LOFT Security Overview

Pledged LOFT revenues consist of revenues received by the county from the first six cents of the local option fuel tax levied and received by the county pursuant to Section 336.025(1)(a), Florida Statues. The state collects the LOFT and distributes it back to the county and its municipalities in accordance with an inter-local agreement between the county and municipalities within the county; however, the rating on the LOFT bonds is not tied to the county's IDR. Under the existing inter-local agreement, LOFT proceeds are allocated 50% based on population and 50% based on transportation expenditures made over the preceding five years. The county's share of LOFT distributions must be at least 47.14% of total county distributions. The inter-local agreement expires in 2037 coincident with the final maturity of the bonds.

Modest LOFT Growth

LOFT collections increased by over 25% in fiscal 2012 due to the installation of 24 large (6.3 million gallons) diesel storage tanks at Port Canaveral. Revenues were essentially flat in fiscals 2013 and 2014 but grew by 6.2% in fiscal 2015. Based on taxable gallons reported in Brevard by the State Department of Revenue, diesel fuel as of June 2016 increased 17% over the previous year while overall fuel gallons increased 10%. Fitch expects more modest growth in LOFT revenues in the future.

Strong Financial Resilience

To evaluate the sensitivity of the LOFT to cyclical decline, Fitch considers both modeled 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 14-year pledged revenue history FAST generates a 5% scenario decline in pledged revenues and the largest actual cumulative decline in historical revenues is a 6.5% decline in fiscal year 2008.

LOFT revenue of $9.5 million in fiscal 2015 covers maximum annual debt service (MADS) by 1.6x. Fitch estimates the structure could tolerate a 38% drop in revenue before coverage reaches 1.0x MADS. The 38% coverage cushion is equivalent to almost 8x the scenario results and 6x the largest actual revenue decline in the review period. These results are consistent with an 'aa' level of coverage cushion. Assuming leverage to the 1.25x ABT, the scenario results are mixed. However, management has indicated that it has no intention of further leverage of the revenue stream. LOFT revenues in excess of debt service are used to fund pay-as-you-go road projects.

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

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1014996

Endorsement Policy

https://www.fitchratings.com/regulatory

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Contacts

Fitch Ratings
Primary Analyst
Michael Rinaldi
Senior Director
+1-212-908-0833
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Grace Wong
Director
+1-212-908-0652
or
Committee Chairperson
Marcy Block
Senior Director
+1-212-908-0239
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Michael Rinaldi
Senior Director
+1-212-908-0833
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Grace Wong
Director
+1-212-908-0652
or
Committee Chairperson
Marcy Block
Senior Director
+1-212-908-0239
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com