Fitch Rates Village Center CDD, FL's VCSA & LSSA Taxable Utility Rev Bonds 'A+/A'; Outlook Stable

NEW YORK--()--Fitch Ratings assigns the following ratings to the Village Center Community Development District, FL (VCCDD or the district) bonds:

--$15.9 million water and sewer refunding revenue bonds, Village Center Service Area (VCSA), series 2014A, 'A+';

--$72.8 million water and sewer improvement revenue bonds, Little Sumter Service Area (LSSA), series 2014B 'A'.

The bonds are expected to sell Sept. 17 or 18 via a negotiated sale. Proceeds are being used to refund outstanding district utility revenue bonds for debt service savings.

The Rating Outlook is Stable.

SECURITY

The series 2014A bonds are secured by a senior lien on the net revenues derived from the district's ownership of the VCSA's water and sewer system. The 2014B bonds are secured by a senior lien on the net revenues derived from the district's ownership of the LSSA's water and sewer system.

KEY RATING DRIVERS

ADEQUATE COVERAGE, HIGH LIQUIDITY: Both service areas' financial profiles reflect narrow debt service coverage (DSC) margins and low free cash flow (FCF), largely offset by exceptionally high liquidity exceeding 1,000 days' cash on hand (DCOH) in fiscal 2013.

AFFORDABLE RATES: Customer charges are very affordable, providing management with solid rate-raising flexibility. As approved by the board of supervisors, rates will increase by 2.5% annually through 2020.

AMPLE CAPACITY SOLID OPERATIONS: Each system has ample supply, treatment, and disposal capability. Daily operations are handled by a third party utility management firm that is widely employed across the state.

HIGHLY SUCCESSFUL RETIREMENT COMMUNITY: The district is located within The Villages, one of the fastest growing retirement communities in the nation. The VCSA and LSSA serve roughly a quarter of the overall Villages' population.

STRONG MANAGEMENT: The district's very strong and experienced management team has a demonstrated track record of positive financial results and consistent operational performance.

DEVELOPER RISK LIMITED: The commercial landowners within the district elect the district's board of supervisors. Four of the five members are either employed by or affiliated with the Villages Developer. Fitch believes the district's exposure to potential developer conflicts and/or financial difficulties is mitigated by statewide statutory constraints imposed on elected officials and independent oversight of district operations by a primarily resident-controlled organization.

LSSA DEBT BURDEN DRIVES NOTCH DISTINCTION: The LSSA system's debt load is expected to remain elevated for the foreseeable future relative to the VCSA's comparatively modest debt profile that is scheduled to fully amortize in 10 years.

RATING SENSITIVITIES

RATING STABILITY EXPECTED: The Stable Outlook reflects Fitch's expectation that despite low coverage margins, near-term financial deterioration is unlikely given each service area's significant liquidity levels, approved annual rate increases, and limited capital needs.

CREDIT PROFILE

The Villages is a retirement community encompassing over 21,000 acres located primarily in Sumter County (implied GO rated 'AA-' by Fitch) in central Florida, about 50 miles northwest of Orlando. A portion of the Villages spills over into Marion County as well as Lake County (implied GO rating of 'AA-'). Begun in the 1970's, the development has experienced extraordinary growth and currently contains over 50,000 homes and over 98,000 residents. The VCSA serves 17,588 people and is fully built-out, and the LSSA serves 24,090 people and is nearing full build-out. Combined, the service areas represent approximately 43% of the Villages' current population and 43% of its footprint.

SIMILAR SERVICE AREA CREDIT CHARACTERISTICS

The district serves as both the obligor and issuer of the series 2014A and 2014B bonds and governs the two distinct service areas that generate pledged revenues. The VCSA and LSSA serve residents in the northern portion of the Villages and provide pledged revenue securing the series 2014A and 2014B bonds, respectively. The customer bases of the two systems are almost entirely comprised of Villages' residents who share nearly identical economic and consumption characteristics. Likewise, the systems' operational profiles, governance structure, customer charges and capital needs are very similar if not identical. The primary difference between the two service areas is their financial and debt profiles.

GOVERNANCE AND MANAGEMENT

The district is a local unit of special purpose government created in 1992 to provide administrative and financial services to other districts within the Villages. The district encompasses only 167 acres but owns and operates the VCSA and LSSA water and wastewater systems, various recreational amenities, and stormwater management facilities.

DEVELOPER RISK OFFSET BY LEGAL AND STRUCTURAL CONSTRAINTS

The district is governed by a five member board of supervisors elected by the district's 16 commercial property owners. Each of the landowners is entitled to one vote per acre owned. The board is responsible for selecting a district manager to manage the district's day-to-day operations. At current, four of the board members are either directly employed by or are affiliated with the developer. This raises the risk that any potential financial problems incurred by the developer could lead the board to take actions in the interest of the developer at the expense of bondholders.

However, Fitch believes such a scenario is unlikely. Board members, as elected officials, are subject to statutory standards of professional responsibility, accountability and disclosure, making it difficult for officials to take actions outside the parameters of the district's governmental responsibilities. In addition, an independent board, the Amenity Authority Committee (AAC), oversees the district's non-debt spending, recreational facilities operations, debt issuance and other activities, thus providing an independent check on district operations.

VCSA: LOW MARGINS, HIGH LIQUIDITY AND LOW DEBT

The VCSA's DSC position has improved over the past five years with growing revenues and flat annual debt service (ADS). In fiscal 2013 the system had 1.4x all-in DSC, including the subordinate lien debt service which will be rolled into the current refunding. With expected interest savings from the current refunding, the VCSA's coverage levels are likely to improve, yet stay low, if the current moderate revenue and expense growth continues.

Somewhat mitigating the below-average DSC margin is the system's exceptionally strong cash position, which equated to 1,617 DCOH and 1,411 days' working capital in fiscal 2013. The VCSA's free cash (after paying for operations and maintenance and debt service), available to fund annual depreciation, was high at 99% in fiscal 2013.

The VCSA system's outstanding debt burden represents the full cost of the system's 1993 purchase price. The debt is scheduled to be fully paid off in 10 years and debt per customer was low at only $993. The system's total debt burden is somewhat above average for the rating level at 60% of net plant and likewise, ADS represents an elevated 41% of the system's gross revenues. Fitch believes that both ADS and debt-to-net-plant metrics will decline with the savings achieved by the current debt refunding.

LSSA: LOWER MARGINS, STRONG LIQUIDITY, HIGHER DEBT

The LSSA has comparatively poorer DSC at only 1.25x in fiscal 2013. This level has stayed largely stable since 2009, boosting to as high as 1.4x in fiscal 2011 due to higher revenues that year. The LSSA system also had high liquidity in fiscal 2013 with 1,376 DCOH and 1,085 days' working capital. Despite the system's ample cash position, the LSSA's thin DSC margins yielded low free cash to depreciation of only 56% in 2013, indicating an inability to fully meet annual capital needs with recurring revenues.

The LSSA was purchased with debt more recently in 2003 and therefore has a comparatively higher debt burden that is not scheduled to be retired for another 20 years. Debt equaled net plant in 2013 and debt per customer was $2,413. ADS represented a high 55% of gross revenues. Despite the savings anticipated with the current refunding, the LSSA's debt metrics will remain elevated for the foreseeable future given the thinner DSC margins and longer debt repayment schedule.

NO NEW DEBT PLANNED

Fitch believes that each system's debt burden will continue to improve as the district has no plans to issue further debt. The rating notch distinction acknowledges the marked difference between the two systems' debt profiles. Fitch expects that over time the LSSA's debt position will more likely reflect the current debt metrics of the VCSA system, at which point upward rating movement may be considered.

BOTH SYSTEMS HAVE AFFORDABLE RATES

The average resident of both service areas consumes between 8,000 and 11,000 gallons per month, nearly 70% of which is for irrigation, the remainder being in-house. The water and sewer bills are paid first as part of a combined 'one-bill' system that also includes the Village's recreational amenity fees. Both systems' revenue bases are almost 100% residential and nearly fully built-out.

The VCSA has 9,200 customers and the LSSA has 12,600 customers. Annual collection rates for each system exceed 98%. In fiscal 2013, the average VCSA resident paid $43.43 and average LSSA resident paid $48.04 for combined water and sewer services. These bills equate to roughly 1% and 1.1% of median household income (MHI), respectively, well below the Fitch affordability threshold of 2% MHI. The board has approved 2.5% annual rate increases for ten years, beginning in 2010 and ending in 2020, a level that should maintain rate affordability and revenue sufficiency going forward. Should increases above what has already been approved be required in the event of revenue shortfalls or additional spending needs, the board retains flexibility to amend the existing rate plan.

SOLID SHARED OPERATIONAL CAPACITIES

The VCSA and LSSA systems are separate utilities that provide potable water treatment and provision, wastewater conveyance and treatment, and the disposal of reclaimed water via irrigation to distinct service areas within the Villages. The VCSA spans 3,500 acres within both Sumter and Lake Counties, including portions of the district seat, the Town of Lady Lake. The LSSA system spans roughly 4,800 acres in both Sumter and Marion Counties.

Raw water is supplied locally through groundwater supply wells from the Floridan Aquifer. Consumptive use permits are regulated by the Southwest Florida Water Management District and are valid through 2017. Current potable supplies are expected to be sufficient for the long term. Wastewater treatment is also sufficient for both systems' minimal needs; the majority of potable water consumption is for irrigation purposes. The district's utility director oversees each utility's contract with a third party operational manager, Operations Management International, Inc., to run the day-to-day system operations. Overall, each system is relatively new and the five-year capital improvement plan (CIP) appears manageable.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in Fitch's Revenue-Supported Rating Criteria, this action was additionally informed by information from Creditscope.

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria' (June 2014);

--'U.S. Water and Sewer Revenue Bond Rating Criteria' (July 2013);

--'2014 Water and Sewer Medians' (December 2013);

--'2014 Outlook: Water and Sewer Sector' (December 2013).

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

U.S. Water and Sewer Revenue Bond Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715275

2014 Water and Sewer Medians

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724358

2014 Outlook: Water and Sewer Sector

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724357

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=870515

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Contacts

Fitch Ratings
Primary Analyst
Eva Rippeteau
Associate Director
+1-212-908-9105
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Andrew DeStefano
Director
+1-212-908-0284
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Eva Rippeteau
Associate Director
+1-212-908-9105
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Andrew DeStefano
Director
+1-212-908-0284
or
Committee Chairperson
Amy Laskey
Managing Director
+1-212-908-0568
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com