Fitch Rates Lake Havasu City, Arizona $46MM GOs 'A'

NEW YORK--(BUSINESS WIRE)--Fitch assigns an 'A' rating to Lake Havasu City, Arizona's $46.05 million junior lien wastewater revenue bonds (general obligation tax backed), Water Infrastructure Financing Authority of Arizona (WIFA) loan, series 2008. The bonds will be privately placed with the WIFA, with the loan closing expected to occur by the week of Oct. 6. The bonds are secured by an ad valorem tax pledge, without legal limit as to rate or amount, annually levied on all taxable property within the boundaries of the city. The bonds are also secured by the net revenues of the city's wastewater system (the system) after payment of all amounts required for the senior lien bonds. Fitch also affirms the following ratings on bonds of the city:

--$7.0 million junior lien wastewater revenue bonds (general obligation tax backed), WIFA loan, series 2002 at 'A';

--$48.41 million junior lien wastewater revenue bonds (general obligation tax backed), WIFA loan, series 2006 at 'A';

--$7.0 million senior lien wastewater revenue bonds, WIFA loan, series 2002 at 'BBB+';

--$11.9 million senior lien wastewater revenue bonds, WIFA loan, series 2006 at 'BBB+';

--$52.9 million senior lien wastewater revenue bonds, WIFA loan, series 2007 at 'BBB+'.

All bonds have a Stable Rating Outlook.

The 'A' rating reflects the city's sound financial performance, rapid principal amortization, and large capital needs that have been driven by system improvements in recent years. Despite softening economic conditions that have weakened revenue growth, the city has limited the impact to general fund reserves by prudently cutting expenditures. Near-term capital costs, including a projected $160 million in borrowing for wastewater infrastructure, are substantial. However, wastewater capital costs are expected to be paid from system revenues and remaining capital needs should have a limited impact on the tax-supported debt structure.

For fiscal 2008, the total unaudited general fund balance represented a healthy 48% of operating expenditures and transfers out, well in excess of the city's two-month fund balance policy. Growth in general fund revenues slowed for fiscals 2007 and 2008, and sales tax receipts, the largest source of general fund revenues, even experienced declines during this timeframe. However, the city has managed revenue constraints by cutting operating expenditures and reducing the sizeable amount of annual pay-as-you-go capital expenditures in order to preserve financial margins. Reserves are forecasted to be pressured over the next few years given the extensive amount of planned cash funding of capital expenditures. However, Fitch believes the city will continue to manage revenue limitations and maintain stated financial targets.

The city's fiscal 2009-2013 capital improvement plan (CIP) totals a substantial $546 million, with nearly 43% of the CIP attributable to system improvements. The city is in year seven of a 10-year program to retrofit the city with a centralized wastewater system (the project), which has elevated system borrowing levels. All remaining project costs are included in the CIP, but system debt levels will continue to rise as almost all capital sources will come from this and future borrowings. Currently, outstanding system debt totals a high $241 million, including $143 million of bonds that are secured by the double-barrel pledge of junior lien system revenues and a general obligation of the city.

Despite the high system leverage, tax-supported debt levels are modest given system debt is, and is expected to continue to be, paid from system revenues. At present, overall debt is just 0.4% of the city's full cash value and $675 per capita. Tax-supported debt levels should remain low through the CIP period as all existing debt will retire over the next five years and limited borrowing apart from that associated with the system is anticipated.

The city, which had a 2007 estimated population of about 55,263, is located in the far west-central portion of Arizona along the eastern edge of Lake Havasu. The city's economy is centered on tourism, with a growing commercial base of recreation, light manufacturing, information, communication, and service companies. Unemployment rates in the city have consistently been well below state and national averages, and for June 2008, the unemployment rate was a moderate 4.4%.

Fitch issued an exposure draft on July 31 proposing a recalibration of tax-supported and water/sewer revenue bond ratings which, if adopted, may result in an upward revision of this rating (see Fitch research 'Exposure Draft: Reassessment of the Municipal Ratings Framework').

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