SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has affirmed the following tax allocation bonds (TABs) for Riverside Public Financing Authority, CA (the PFA):
--$87.7 million (Arlington, Magnolia Center, Hunter Park/Northside, University Corridor/Sycamore Canyon Merged, & La Sierra/Arlanza Redevelopment Projects) TABs, series 2007C, at 'BBB+';
--$36.3 million (Arlington, Magnolia Center, Hunter Park/Northside, University Corridor/Sycamore Canyon Merged, & La Sierra/Arlanza Redevelopment Projects) taxable TABs, series 2007D, at 'BBB+'.
The Rating Outlook is Stable
SECURITY
The bonds are secured by loan repayments to the PFA from non-housing tax increment revenue net of applicable pass-through payments and county administrative expenses. They are additionally payable from housing increment on a subordinate basis to housing TABs, in each of the project areas. While revenue pledged to debt service combines repayments from all project areas, none of the project areas is responsible for the shortfall in another's payments per the TAB indenture. The bonds additionally are backed by an MBIA debt service reserve surety bond of questionable value.
KEY RATING DRIVERS
WEAKEST LINK ANALYSIS: As a several but not joint obligation, the rating is based on Fitch's assessment of the weakest of the five project areas. Fitch assesses the credit quality of the Magnolia, La Sierra/Arlanza, and Arlington project areas to be similar and slightly weaker than the Hunter Park/Northside and University Corridor/Sycamore Canyon Merged areas. All five are poised to benefit from a strengthening economy and real estate market.
ADEQUATE AV CUSHION: Assessed valuation (AV) cushions (the amount of AV decline that can be absorbed before coverage becomes sum sufficient) range from adequate to high, with all project areas capable of absorbing at least a 25% AV decline from fiscal 2014 levels.
HIGH TAX BASE CONCENTRATION: All project areas are highly concentrated, with the top 10 taxpayers making up between 15% and 38% of AV, and between 40% and 70% of incremental valuation (IV).
LACK OF MATURITY: Four of the project areas are relatively new and have low IV to base year ratios with revenue performance highly sensitive to AV declines.
ECONOMIC RECOVERY UNDERWAY: The city's economy was severely affected by the housing downturn, but employment is in the midst of a multi-year recovery, and housing prices have climbed substantially from trough levels.
COMPLIANCE WITH DISSOLUTION PROCEDURES: Dissolution-related risks are being mitigated as management is continuing to adhere to indenture requirements, necessary revenue tracking is in place, timely and robust continuing disclosure reports are being provided, and California's Department of Finance (DOF) is approving debt service reserves to mitigate dissolution-related cash flow issues.
RATING SENSITIVITIES
ASSESSED VALUES AND AV CUSHIONS: The rating is sensitive to shifts in fundamental credit characteristics including each project area's tax base performance and AV cushion levels. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.
CREDIT PROFILE
The city of Riverside is located in western Riverside County in California's Inland Empire. The project areas together comprise a very large 16,295 acres and 44% of the city's fiscal 2013 AV.
EMPLOYMENT RECOVERY CONTINUES, HOME PRICES UP SUBSTANTIALLY
The city is in its fifth year of employment recovery, with 2013 employment at last surpassing its prior peak in 2007. Regional employment sectors experiencing the most rapid growth include education and health care (6.6% annualized growth from 2009-2013), transportation and utilities (6.3%), and construction (5.3%). Despite the employment market's progress, April 2014 unemployment remained elevated at 8.4% versus state and national averages of 7.3% and 5.9%, respectively. City per capita income levels remain below average, at 77% and 82% of state and nation rates, respectively.
The city's housing market has realized substantial gains over the past year with April 2014 values up an impressive 23% year-over-year according to Zillow. January 2014 values were up 25% year-over-year and are the basis upon which fiscal 2015 AV levels will be determined. AV in the project areas are unlikely to rise by the same degree as home market values for three reasons. First, the project areas contain significant commercial real estate concentration, and changes to commercial values have lagged residential values over the past several years. Second, Proposition 13 limits AV increases to no more than 2% annually (unless property turns over), except for properties subject to a Proposition 8 AV reduction. It is unknown what proportion of properties in the project areas are subject to Proposition 8. Last, it is unclear to what extent city-wide residential value gains apply to the housing stocks located within the project areas.
Despite these limitations, Fitch believes the project areas ultimately will benefit by some positive valuation tailwinds from the broader regional real estate recovery. Fitch's base case 5% AV growth assumption for fiscal 2015 matches the city's assumption and is based on a discount to the 6.5% growth estimate provided by the county. To the extent that the project areas realize growth in excess of these estimates, there could be positive credit implications assuming these gains appear likely to hold or expand.
ANALYTICAL REFINEMENT CONSIDERS POSITIVE EFFECTS OF DISSOLUTION
On May 1 Fitch refined its California RDA analysis pertaining to the beneficial impact of dissolution legislation (AB 1X 26). Fitch now considers TAB liens to be closed and surplus housing revenues to be available for non-housing TAB debt service. Although Fitch views these factors as positive credit characteristics, they were not sufficient to result in a positive rating action.
Fitch formerly excluded positive dissolution factors from consideration, reflecting a conservative approach to a dissolution environment marked by legislative, administrative, and judicial uncertainty. Two-and-a-half years and six recognized obligation payments schedule (ROPS) cycles have passed since dissolution, during which the factors have benefitted TAB credit quality with no successful legal challenges to date. Although uncertainties remain, Fitch views the continued presence of closed TAB liens and surplus housing revenue availability as more likely than not to remain a feature of California TABs.
MAGNOLIA PROJECT AREA SMALL, CONCENTRATED; LACKS MATURITY
The Magnolia project area is a very small, highly concentrated project area that nonetheless benefits from a currently adequate AV cushion. Established in 1998, the project area lacks maturity, with a low IV to base year value of just 100%. This results in a high degree of revenue volatility when AV declines. Additionally, the project area's top 10 property taxpayers make up 34% of AV and a very high 70% of IV. The fiscal consultant is projecting that pending appeals will result in a $13 million AV loss, or a manageable 2.1% of AV. This is moderately higher than fiscal 2013 appeals, but represents a significant improvement over fiscal 2011 levels, estimated at 4.8% of AV. The project area's AV increased 2.5% in fiscal 2014 following a modest 2.3% loss in fiscal 2013. Total recessionary losses were a modest 2.6% from peak to trough.
Magnolia's Fitch-estimated fiscal 2014 net revenues of $2.9 million cover parity debt service of $1.2 million by 2.4x. If appeals are applied at levels the fiscal consultant currently is projecting on top of a Fitch-projected 5% AV gain, Fitch-estimated debt service coverage will increase moderately to 2.6x in fiscal 2015. Fitch estimates the project area's AV cushion at an adequate 27.9% based on 2014 AV levels.
LA SIERRA/ARLANZA PROJECT AREA HIGHLY CONCENTRATED, VOLATILE
The La Sierra/Arlanza project area is a very large 6,424 acres with an adequate AV cushion. However, these strengths are partially offset by the project area's very low degree of tax base maturity and high concentration levels. Formed in 2005, the project area's IV to base year value is extremely low at just 62%, resulting in a very high degree of revenue volatility when AV declines. The project area's top 10 taxpayers make up 15% of AV and a very high 42% of IV. The project area's AV has experienced substantial volatility, exhibiting extremely high growth prior to the recession with steep declines during the recession. In fiscal 2014 AV and IV gained 3.4% and 9.5%, respectively. The agency's consultant-estimated pending appeal losses equal a manageable 1.6% ($59 million), up somewhat from the year prior.
La Sierra/Arlanza's Fitch-estimated fiscal 2014 net revenues of $13.6 million cover senior parity debt service of $3 million 4.5x. If appeals are applied at levels the fiscal consultant currently is projecting on top of a Fitch-projected 5% AV gain, Fitch-estimated debt service coverage will increase somewhat to 4.9x in fiscal 2014. Fitch estimates the project area's AV cushion at an adequate 29.7% based on 2014 AV levels.
ARLINGTON PROJECT AREA- ADEQUATE AV CUSHION, HIGH CONCENTRATION
The Arlington project area is very highly concentrated and somewhat lacking in maturity, but medium-sized with an adequate AV cushion. Established in 1978, the project area's IV to base year ratio is low at just 107%, resulting in a high degree of revenue volatility when AV declines. The project area's top 10 taxpayers make up 26% of AV and a very high 51% of IV.
Nonetheless, the project area is well-diversified by land use. As of 2007 (the most recent land use information available), the project area's AV was 41% residential, 29% commercial, 9% unsecured, and 5% industrial. The project area's total recessionary peak-to-trough AV decline was a significant 11.3%, with a 3.1% AV gain in fiscal 2014 marking the tax base's first year of recovery. The fiscal consultant projects pending appeals will result in a small $14.4 million AV loss (1.9% of AV), representing a modest improvement from the year prior.
Fiscal 2013 AV levels have been revised significantly downward by 13.6% compared to Fitch's previous review as the most recent continuing disclosure report removed AV of a major taxpayer whose increment is not pledged to debt service. Prior years' disclosure included related AV, an error which materially boosted Fitch-estimated debt service coverage levels. This change led Fitch to view the credit quality of the project area to be on par with, rather than stronger than, the bond's other two weakest project areas: La Sierra and Magnolia.
Arlington's Fitch-estimated fiscal 2014 net revenues of $3.6 million cover parity senior debt service of $1.7 million 2.1x. If appeals are applied at levels the fiscal consultant currently is projecting on top of a Fitch-projected 5% AV gain, Fitch-estimated debt service coverage will increase somewhat to 2.2x in fiscal 2015. Fitch estimates the project area's AV cushion at an adequate 25.1% based on 2014 AV levels.
HUNTER PARK/NORTHSIDE PROJECT AREA ENJOYS SOUND AV CUSHION
The Hunter Park/Northside project area is large at 2,636 acres but is highly concentrated and lacks tax base maturity. However, the project area's AV cushion is sound. Established in 2003, this project area has a very low IV to base year value of just 96%, resulting in a very high degree of revenue volatility when AV declines. The project area's top 10 payers make up 19% of AV and a high 40% of IV.
The project area's diversified land usage somewhat mitigates these concerns. AV is 33% industrial, 31% residential, 15% commercial, 12% unsecured, and 9% other. Consultant-estimated appeals remained relatively flat in fiscal 2014 at 2.1% of AV ($30.8 million) versus 2% the year prior. The project area has enjoyed solid gains since the housing-led recession, posting a 5.8% AV gain (13% IV gain) in fiscal 2013 followed by a more modest 1.9% increase in fiscal 2014.
Hunter Park/Northside's Fitch-estimated fiscal 2014 net revenues of $7.1 million cover parity debt service of $1.5 million 4.6x. If appeals are applied at levels the fiscal consultant currently is projecting on top of a Fitch-projected 5% AV gain, Fitch-estimated debt service coverage will increase moderately to 4.9x for fiscal 2015. Fitch estimates the project area's AV cushion at a sound 38.2% based on 2014 AV levels.
UNIVERSITY/SYCAMORE PROJECT AREA- HIGH AV CUSHION
The University/Sycamore merged project area is a large 2,346 acres and it benefits from a high AV cushion and a mature tax base. The University and Sycamore sub-areas were formed in 1977 and 1983, respectively. Due to their age, the IV to base year value is a high 1108%, resulting in a low degree of revenue sensitivity to AV volatility. The top 10 taxpayers make up 38% of AV and a very high 42% of IV. The project area's AV grew or remained flat through most of the recession, but has fallen over the past three years while other project areas generally have been experiencing improvements. The agency's consultant-estimated appeals losses have also been increasing, though to a still manageable 3.3% of AV ($42.7 million) compared to 2.8% the year prior.
University/Sycamore's Fitch-estimated fiscal 2014 net revenues of $7.2 million cover parity debt service of $2.7 million 2.7x. If appeals are applied at levels the fiscal consultant currently is projecting on top of a Fitch-projected 5% AV gain, Fitch-estimated debt service coverage will increase slightly in fiscal 2015. Fitch estimates the project area's AV cushion at a high 47.4% based on 2014 AV levels.
SATISFACTORY IMPLEMENTATION OF DISSOLUTION PROCEDURES
Management appears to be acting in conformity with its bond indentures, despite the administrative hurdles imposed by dissolution law (AB 1X 26). Management is continuing to track revenues on a project area-specific basis and is adhering to the senior/subordinate status of its various obligations. Dissolution law imposed a cash flow timing issue on the agency, which is being fully mitigated with the use of a debt service reserve fund, allowed under AB1484. Continuing disclosure remains timely and robust and the agency has received its finding of completion from the state's department of finance.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, and Zillow.com.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=836559
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