NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BB+' rating on the following Detroit Downtown Development Authority bonds:
--$33.8 million tax increment refunding bonds (Development Area No. 1 projects), series 1998A;
--$16.1 million tax increment bonds (Development Area No. 1 projects), series 1998B (taxable).
The Rating Outlook is Stable.
Bonds are backed by a pledge of tax increment revenues captured by Development Area No. 1 net of those captured for school district purposes (school capture). The debt service reserve (DSR) is funded with a surety policy.
KEY RATING DRIVERS
The 'BB+' rating reflects historically declining trends in pledged tax increment revenue which show emerging signs of reversing, high taxpayer concentration, a cautious outlook on Detroit's economy and the closed lien on pledged revenues.
Caution on Pledged Revenue Growth: Historical revenue trends have been very weak, but ongoing investments in and around Development Area 1 have led to recent improvement. Fitch believes strong near-term pledged revenue growth is likely. However, this expectation is balanced against concerns about the longer-term sustainability of existing and additional development in the area. Fitch thus expects long-term revenue growth will be slow.
Limited Resilience: Debt service coverage has improved to 1.6x with fiscal 2016 pledged revenue growth of 26% and the recent defeasance of $3 million in outstanding debt. Despite the very recent improvement, Fitch believes a high level of taxpayer concentration, sizable historical pledged revenue declines and notable revenue volatility contribute to the debt structure's limited resilience through economic cycles.
Change in pledged revenue expectations: The rating is sensitive to performance of pledged tax increment revenue outside of Fitch's expectations. A consistent trend of solid improvement could result in an upgrade; conversely, a return to pronounced, multi-year declines could lead to a downgrade.
The DDA was formed in 1976 to promote economic development in downtown Detroit. Development Area No. 1 is roughly coterminous with the downtown business district and represents about 9% of the city's taxable value. In addition to the GM-owned Renaissance Center, the district includes one of the city's three casinos, stadiums for the Detroit Lions and Detroit Tigers, and development along the city's waterfront.
A multipurpose events center that will be home to the Detroit Red Wings, owned by the DDA and thus tax-exempt, is under construction within the project area. Development near the events center site is ongoing and contributes to expectations for solid pledged revenue growth in at least the near term. Additional private residential and commercial development includes investment by Quicken Loans and a trolley connection to Wayne State University.
Captured (incremental) value is a moderate 166% of the base, exposing pledged revenue to a large degree of volatility for a given decline in taxable value (TV) absent a change in tax rates. Taxpayer concentration is quite high, with the top 10 payers making up 51% of TV and 83% of captured value. General Motors Corp. (GM) is the largest taxpayer at almost 20% of TV.
The series 1998 bonds have a senior lien on general tax increment revenues, and are not secured by 'catalyst' revenues that are pledged to bonds issued in 2014 by the Michigan Strategic Fund for the construction of the multipurpose events center. With the 2014 issuance, the senior lien has been closed.
To evaluate the sensitivity of the dedicated revenue stream to cyclical decline, Fitch considers both revenue sensitivity results (using a 1% decline in national GDP scenario) and the largest decline in revenues over the period covered by the revenue sensitivity analysis.
Based on tax increment revenue history, Fitch's analytical sensitivity tool (FAST) generates a high 6.9% scenario decline in pledged revenues. Tax increment revenues have been on a generally declining trend for more than a decade; the largest cumulative decline was a 31% drop from fiscal 2009-2013. The declines reflect general economic weakening in the city of Detroit, including automaker bankruptcies, compounded by the recession. Since then, prospects for the automakers have improved -- GM's IDR is 'BBB-'/Outlook Positive; Ford's is 'BBB'/Outlook Stable.
Pledged revenues could withstand a 36% decline before they were insufficient to fully cover debt service. This is 1.2x the largest actual cumulative decline, or 5.2x the recessionary impact estimated in Fitch's FAST scenario. Fitch believes that this level of resilience is consistent with a 'BB' category rating.
The city's economic indicators continue to be exceptionally weak despite some recent improvement. The unemployment rate is still high but about half of its recessionary peak. Employment gains are emerging but are below the rate of national growth and the poverty rate is quite high. Population losses have slowed.
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.
U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)
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