NEW YORK--(BUSINESS WIRE)--Fitch Ratings takes the following rating action on Overland Park Development Corporation, Kansas (the corporation) as part of its continuous surveillance effort:
--$66.2 million outstanding second tier refunding revenue bonds, series 2007B downgraded to 'BB' from 'BBB+'.
The Rating Outlook is Stable.
--The downgrade to 'BB' from 'BBB+' reflects the inadequacy of citywide
hotel tax revenues to fully support debt service.
--Fitch gives little weight in its rating to the pledge of net operating revenue from a single site convention center hotel. As such, the lack of sufficient coverage from the citywide hotel tax precludes an investment grade rating.
--Hotel tax revenues plus net operating revenues covered 2010 debt service roughly 1.0 time.
--There is a fully cash funded debt service reserve.
--Non-appropriation risk of hotel tax revenues is low given the adverse rating impact such action would have on the city of Overland Park's (the city) current 'AAA' general obligation bond rating.
--Fitch believes the city's deep and diverse economy supports sustainable long-term hotel demand despite recent weaknesses.
KEY RATING DRIVERS:
--Recovery and growth of the hotel tax in proportion to escalating debt
--The rate of depletion of the debt service reserve if both pledged revenue sources continue performing below initial projections.
The bonds are special limited obligations payable from a subordinate lien on the net operating revenues of the convention hotel, a cash-funded debt service reserve equal to the IRS standard, and a 4.5% citywide hotel tax, subject to annual appropriation. The bonds also have a subordinate lien on the leasehold interest of the convention hotel.
The corporation is a not-for-profit entity created for the sole purpose of constructing and owning a 412-room convention hotel located adjacent to the city's convention center. The corporation board is comprised of six members of the city governing body, appointed by the mayor and approved by the city council. The convention hotel opened in December 2002 and is operated as a Sheraton Hotel under a hotel operating agreement with Starwood Hotels & Resort that expires in November 2022. The city's convention center opened in 2002 and primarily hosts regional business and community needs in 60,000 square feet of exhibit space and a 25,000 square foot ballroom.
Although available citywide hotel tax revenues supplement the subordinate pledge of net revenues from the convention hotel, Fitch's rating is based primarily on the coverage generated from the 4.5% citywide hotel tax imposed upon the roughly 5,100 available hotel rooms located within the city. A citywide hotel tax has been levied since 1982 and is collected by the state and remitted to the city quarterly minus a 2% collection fee. Pursuant to a debt service support agreement between the city and the corporation, Overland Park has covenanted to budget sufficient hotel tax revenues to pay the next year's debt service on the second tier bonds. However, the allocation of hotel tax revenues is subject to annual appropriation and is capped at amounts received solely from the 4.5% hotel tax. Once the city appropriates funds, the obligation is absolute and unconditional without abatement, deduction or set-off and counterclaim. The commitment of hotel tax revenues can be released if debt service coverage from net revenues of the convention hotel exceeds 2.25 times (x) for three consecutive years, but is reinstated if coverage falls below 1.75x at anytime through maturity. Other legal provisions, which only provide meaningful credit strength in the unlikely event that the hotel tax commitment is released, include the crediting of all convention hotel revenues under a lockbox agreement with the trustee, and a 1.05x rate covenant.
Between 1994 and 2006, the citywide hotel tax experienced a compounded annual growth rate of 6.1%, thus the hotel tax was reasonably forecasted to increase annually 3.7% between 2007 and 2018. Based on the 2007 forecast, available hotel tax revenues were projected to fully cover annual debt service at least 1.4x throughout the life of the bonds. However, due to the magnitude of the economic recession, actual hotel tax revenues have deviated materially from projections. Actual available hotel tax revenues in 2008 and 2009 were 9% and 28% below the 2007 projections, respectively, and 2010 revenues are projected to be 30% below projections. As a result, hotel tax revenues in 2008, 2009 and 2010 covered annual debt service 1.3x, 0.8x, and 0.9x, respectively. Net operating revenues from the convention hotel and other balances have enhanced debt service coverage for the past three years. Combined hotel tax and net operating revenues for 2008, 2009 and 2010 covered annual debt service 1.8x, 1.1x and 1.0x, respectively.
The bonds are also supported by a cash funded debt service reserve totaling $6.56 million as of Dec. 31, 2010. As a stress test, if 2010 hotel tax revenues were held flat and no revenues were received from the net operating revenue pledge, the debt service reserve would be exhausted by 2018. However, based on recent month-over-month data, both citywide hotel occupancy rates and revenue per available room are improving, potentially signifying a shift in the negative revenue trend. Based on Fitch's calculations, 3.45% annual growth in citywide hotel tax revenues plus amounts in the debt service reserve would be sufficient to satisfy debt service in all years with no contribution from net hotel operating revenues.
Overland Park, the second largest city in the state of Kansas, is an affluent community located within the Kansas City metropolitan region that benefits from a deep and diverse local economy, an extensive transportation network, available land, and a well-educated workforce. Several Fortune 500 companies are located within the city. The financial services and professional and business service sectors account for a greater percentage of total countywide employment than the national average. Continuing a multi-decade growth trend, the city's 2009 estimated population of 174,907 is up 15% since 2000.
Wealth levels are above average at 150% and 142% of the state and national averages, respectively. The city's October 2010 unemployment rate of 6.4% compared favorably to the national average. The city's declining unemployment rate potentially signifies re-absorption of the city's educated workforce, of which 55% attain higher education versus 27% nationally.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in the Tax-Supported Rating Criteria this action was additionally informed by information from Creditscope, LoanPerformance, Inc., University Financial Associates, and IHS Global Insight.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria,' dated Aug. 16, 2010.
--'U.S. Local Government Tax-Supported Rating Criteria', dated Oct. 8, 2010.
For information on Build America Bonds, visit www.fitchratings.com/BABs.
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria