Fitch Revises Outlook on PA Economic Development Financing Auth's Sr. Parking Revs to Negative

CHICAGO--()--Fitch Ratings has affirmed the 'BBB-' rating on the Pennsylvania Economic Development Financing Authority's (PEDFA) approximately $123 million Capitol Region Parking System (the system) senior parking revenue bonds series 2013A.

The Rating Outlook is revised to Negative.

RATING RATIONALE

The Negative Outlook reflects ongoing uncertainty over the legal structure regarding the payment stream according to the cash flow waterfall, in conjunction with revenue underperformance, which leaves funding for capital expenditure needs at risk. This uncertainty is manifest in notices of default, breach of rate covenant, and ongoing disputes between parties. Favorable resolution of the outstanding issues that does not adversely affect bondholders or capital funding could lead to a return to a Stable Outlook.

The rating reflects the Capitol Region Parking System's quasi-monopolistic position and strong non-compete covenants within its service territory, which encompasses the economically-important central business district of Pennsylvania's capital. A key credit strength of the series 2013A bonds is the Commonwealth's co-terminus parking lease of 70% of the system's spaces, which provides at least 1.50x gross senior debt service coverage on the series 2013A bonds through maturity. The rating is currently constrained by high leverage, minimal liquidity, limited capital funding, and untested willingness and rate-making flexibility.

KEY RATING DRIVERS

Dominant Position, Lagging Performance: The system covers virtually all on-street metered parking and a majority of the off-street public parking in Harrisburg. Strong non-compete covenants are expected to provide adequate market share protection and the high degree of governmental jobs in the area, along with the commonwealth parking contract, should provide some degree of demand stability. Still, future growth in parking revenues is likely to mirror the tepid historical performance.

Rate-Making Authority: Contracted rate schedules provide for large increases in the initial years, followed by annual escalators thereafter. Rates currently remain competitive versus the national average but could become uncompetitive to the extent greater than inflationary rate increases were to be needed to support revenue underperformance or increased lifecycle cost investments.

Structural Features Have Weaknesses: Structural features are lacking as shown through limited requirements for liquidity and leverage protections, no established operating reserves and debt service reserves funded through surety policies. In addition, reserving for capital maintenance falls at the bottom of the cash flow waterfall, which presents funding risks for ongoing capital investments to the extent payments toward subordinate obligations depend on county guarantee support. Senior tenor is long with a 30-year final maturity and subject to some capital appreciation. Positively, the parking system debt is fixed rate and fully amortizing.

Some Risk in Capital Plan: Existing facilities are represented to generally be in a state of good repair but vary greatly across assets and include life safety issues that need immediate attention. The authority's 40-year capital program totals $115 million with an additional $22 million budgeted for periodic meter replacement and technology upgrades. In the medium term, $1.1 to $1.7 million will be spent annually. Funded with bond proceeds, a $9 million capital reserve has been spent down to $4.7 million and remains at risk of full depletion in situations of modest revenue underperformance. Future funding of capital expenditures may rely on additional leveraging as internal funding is structurally dependent on excess cash flow following all other required deposits and as the reserve is tapped.

High Leverage, Growth Needed: Senior leverage is initially high at approximately 9.4x net debt-to-cash flow available from debt service for FY15, but migrates to a more modest 6x by 2021 in Fitch's rating case. The system has an escalating debt service profile, including capital appreciation, which requires aggressive revenue growth to cover increasing debt service obligations as well as ongoing capital needs. Fitch's rating case forecasts senior lien coverage to average 2.50x with a minimum coverage of at least 2.40x, based on a net revenue calculation. Liquidity remains a concern with minimal unrestricted cash and no operating reserve.

Peer Comps: Closest publicly Fitch-rated peer is Miami Parking, rated 'A'/Outlook Stable. This parking credit represents a larger city system in a very strong metropolitan statistical area and is financially protected with significantly lower leverage, stronger liquidity and stronger DSCR.

RATING SENSITIVITIES

Negative:

--Unfavorable resolution of the ongoing payment waterfall dispute that further stresses cashflows and the system's ability to cover capital expenditure needs would likely result in a downgrade;

--Upward cost revisions to system capital needs or inadequate asset maintenance and reinvestment may result in negative rating action;

--Increased leverage that erodes financial flexibility could pressure the current rating level.

Positive:

--Upward rating mobility is not likely at this time, given the high leverage and low liquidity coupled with ongoing capital needs and uncertain funding.

SUMMARY OF CREDIT

The system is a project of the PEDFA. The operations of the system were transferred under the terms of the asset transfer agreement to PEDFA, a public body corporate and politic and an instrumentality of the Commonwealth of Pennsylvania, from the Harrisburg Parking Authority (HPA) and the City of Harrisburg, Pennsylvania (City) on Dec. 23, 2013. The system includes nine parking garages, two parking lots, and approximately 1,200 metered on-street spaces located in Harrisburg, PA.

Performance Update

There have been nearly three full years of operations since the Capitol Region Parking System lease inception. For the second straight year, the system failed to meet its 1.25x all-in debt service coverage ratio (DSCR) rate covenant (net revenues, inclusive of the series B&C debt service) (1.08x for FY15 and 1.22x for FY14), reflecting some transitional and operational issues. However, this is not an event of default and indenture-based gross coverage of the senior series 2013A bonds was a robust 3.50x in FY15 (2.47x net), up from 3.43x in FY14.

Further, bolstered in part by the additional revenue from 765 spaces added to the commonwealth's contract, all-in DSCR is estimated to meet the authority's 1.25x budget and comply with the rate covenant for FY16. Based on nine months through Sept. 30, senior DSCR is estimated to remain strong at 3.53x/2.77x (gross/net).

Difficulties in collecting enforcement revenues have been a primary reason that revenues have not met budget expectations for FY14 and FY15, but these issues have been fully resolved, and enforcement revenues are on budget for FY16, which should be a new baseline going forward.

CDM Smith conducted is triennial parking system condition report in July 2016 noting that while conditions widely varied across facilities, overall the system was found to generally be in a good state of repair. They formulated a 10-year capital plan averaging around $1.3 million per year, which has been incorporated into the sponsor's 10-year cash flow projections. To the extend cash flow is insufficient, the current capital reserve balance is approximately $4.7 million. Capital expenditures in 2016 totalled $2.8 million and focused on automating garage entrances, exits and pay stations and lighting improvements at three garages that could save as much as $100,000/year in expenses. The 2017 capital plan is around $1.5 million. Fitch will continue to monitor PEDFA's capex plan given its history of deferred maintenance. Any additional significant deferrals of capital improvements that result in inadequate asset maintenance or significant additional leverage needed for capex maintenance could pressure the rating.

Disputes are ongoing related to legal framework of the transaction and where payments to the city and HPA fall in the waterfall. Approximately $1.4 million in unpaid payments have accrued, but it is not yet clear how much, if any, of this will need to be paid. Notices of default have been filed, but the agreements cannot be terminated and all parties are working towards resolution. Fitch will continue to monitor the situation and its potential impact on credit quality of the series 2013A bonds.

Fitch Cases

Fitch's base case projects Fitch-defined senior net coverage to average 2.58x through 2025 with coverage never falling below 2.50x. Under its rating case scenario, Fitch-defined senior net coverage averages 2.50x through 2025 and never falls below 2.40x. These debt service coverage ratios include only senior expenses pursuant to the trust indenture's flow of funds and do not address subordinate expenses or capital needs of the system. Fitch's cases take into account estimated 2016 results and include assumptions of flat enforcement revenues and reduced garage and meter revenue growth coupled with higher expense growth. Fitch's rating case projects senior leverage on a net basis (excluding capital appreciation) to fall from an estimated 7.3x in FY16 to 6x by 2021 and 5x by 2025.

SECURITY

The series 2013A senior bonds are secured by a senior in payment gross pledge of the parking revenues (which are net of a 20% off-street parking tax to the city) generated by the capitol region parking system's facilities and meters.

Additional information is available on www.fitchratings.com

Applicable Criteria

Rating Criteria for Infrastructure and Project Finance (pub. 08 Jul 2016)

https://www.fitchratings.com/site/re/882594

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Contacts

Fitch Ratings
Primary Analyst
Jeffrey Lack
Director
+1-312-368-3171
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Stacey Mawson
Director
+1-212-908-0678
or
Committee Chairperson
Scott Zuchorski
Senior Director
+1-212-908-0659
or
Media Relations:
Sandro Scenga, New York, +1 212-908-0278
Email: sandro.scenga@fitchratings.com