Fitch Upgrades Menlo Park CDA, CA's TABs to 'BBB+'; Outlook Revised to Stable

NEW YORK--()--Fitch Ratings has upgraded the following ratings of Menlo Park Community Development Agency, California's (the agency) tax allocation bonds (TABs):

--$57.6 million TABs, series 2006 (Las Pulgas Community Development Project) to 'BBB+' from 'BBB'.

The Rating Outlook is revised to Stable from Positive.

SECURITY

Pursuant to the indenture, the TABs are secured by tax increment revenue from the project area, net of county administrative expenses, and are additionally payable from the surplus 20% housing set-aside revenue. The bonds have a cash-funded debt service reserve fund.

KEY RATING DRIVERS

STRENGTHENED AV CUSHION/POSITIVE PROSPECTS: The upgrade to 'BBB+' from 'BBB' reflects continued improvement in the TABs assessed value (AV) cushion (defined as the degree of AV loss required to cause debt service coverage to fall to a sum sufficient amount), which increased to a high 42% in fiscal 2015. Fitch expects further AV gains in fiscal 2016 given actual city-wide AV growth and recent top taxpayer expansion within the project area.

CONCENTRATED PROJECT AREA: The small project area is highly concentrated among its top taxpayers and experienced a significant AV loss during the recession. However, the project area is mature, and benefits from a high incremental value (IV) to base year value which reduces revenue volatility due to AV fluctuations.

STRONG LOCAL ECONOMY: Menlo Park is a mature and affluent community in Silicon Valley with low unemployment, extremely high and rising home values, and an expanding employment base.

CLOSED LIEN AFTER DISSOLUTION: Fitch considers all TAB liens to be closed as successor agencies (SAs) are not permitted to issue new money TABs. In addition, Fitch recognizes the availability of surplus 20% housing set-aside revenues for non-housing TAB debt service.

RATING SENSITIVITIES

TAX BASE STABILITY: Significant shifts in AV resulting in meaningful changes in the AV cushion could prompt a rating action, either positive or negative.

CREDIT PROFILE

Menlo Park (general obligation bonds rated 'AAA' with a Stable Outlook) is located in the San Francisco Bay Area's peninsula region, benefitting from access to the large and broad employment markets between San Jose and San Francisco.

IMPROVEMENT IN AV CUSHION/SOUND DEBT SERVICE COVERAGE

Fiscal 2015 marks the third consecutive year of growth in AV, which increased by a solid 7%, compared to 4.7% the prior year. This increased the AV cushion to a high 42%, compared to 38% in fiscal 2014. The AV cushion is more than double the project area's substantial peak to trough AV loss of 18.7% from fiscal years 2009-2012. The magnitude of loss reflects the project area's taxpayer concentration in the economically cyclical high-tech industries.

Fitch-estimated fiscal 2015 tax increment revenues of $11.3 million cover maximum annual debt service (MADS) 1.84x and annual debt service (ADS) 1.98x. MADS occurs in fiscal 2017 and declines moderately thereafter.

The TABs are variable rate bonds that are hedged with a fixed-payor swap that is subject to termination based on Moody's below investment grade rating of the TABs. Risks associated with the variable-rate bonds and swap are essentially mitigated given MADS coverage would be above 1.0x were the TABs to reach the maximum 12% interest rate and assuming full availability of tax increment revenue. Also, the termination value of the swap, if such an event occurred, is payable on a basis subordinate to debt service payments of the TABs. The agency is in the preliminary stages of refinancing the debt to a fixed rate and terminating the swap.

CONTINUED PROJECT AREA AV GROWTH EXPECTED

Fiscal 2016 AV for the project area has not yet been released by the county assessor. However, city-wide AV increased by a very strong 11.4% in 2015 (derived from the AV of all properties as of Jan. 1, 2015), which is the highest percentage increase in San Mateo county. The city's AV increase, as well as ongoing expansion within the project area, supports Fitch's expectation of sustained solid growth in AV within the project area over the near to medium term.

PROJECT AREA CONCENTRATION OFFSET BY MATURITY/POSITIVE TRENDS

The project area is small at 857 acres and is highly concentrated, with the top 10 taxpayers comprising about 39% of AV (42% of incremental value [IV]) in fiscal 2015. These weaknesses are somewhat offset by the project area's high IV to base year value of 1159%, resulting in a low degree of revenue sensitivity to AV volatility. Additionally, Facebook, the largest project area taxpayer (approximately 21% of AV and 23% of IV) recently opened a new campus within the project area and has plans for further expansion both within and adjacent to the project area.

VERY STRONG CITY-WIDE ECONOMIC CHARACTERISTICS

Menlo Park's economic characteristics are exceptionally strong, with very high educational attainment levels and median per capita incomes 230% and 241% of the state and national averages, respectively. Unemployment is well below state and national averages at 2.5% in April 2015.

REDEVELOPMENT DISSOLUTION NEUTRAL TO POSITIVE IMPACT

In May 2014, Fitch refined its California redevelopment agency analysis pertaining to the beneficial impact of dissolution legislation (AB1X 26). Fitch now considers all TAB liens to be closed and surplus housing revenues to be available for non-housing TAB debt service. 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.

COMPLIANCE WITH DISSOLUTION PROCEDURES

Dissolution related (AB1X 26) risks are lessening as management is continuing to adhere to indenture requirements, and necessary revenue tracking is in place. The agency is not required to produce continuing disclosures, per the TAB's indenture, as long as the bonds are traded in daily or weekly variable rate mode. This weakness is offset by Fitch's expectation that the agency will make available to Fitch on an ongoing basis required information needed to continue rating the bonds, including data related to AV and the top taxpayers. Since dissolution, the agency's procedures to manage dissolution have been well-established, lessening operational risks.

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, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, and the National Association of Realtors.

Applicable Criteria

Tax-Supported Rating Criteria (pub. 14 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=988676

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=988676

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Nicole Wood
Director
+1-212-908-0735
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Stephen Walsh
Director
+1-415-732-7573
or
Committee Chairperson
Doug Scott
Managing Director
+1-512-215-3725
or
Media Relations
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Nicole Wood
Director
+1-212-908-0735
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Stephen Walsh
Director
+1-415-732-7573
or
Committee Chairperson
Doug Scott
Managing Director
+1-512-215-3725
or
Media Relations
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com