NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'AA-' rating assigned to the following Santa Monica Redevelopment Agency, California (the agency) tax allocation bonds (TABs):
--$41.05 million outstanding earthquake recovery redevelopment project series 2011 and
--$45.29 million outstanding earthquake recovery redevelopment project series 2006A at 'AA-'.
The Rating Outlook is Stable.
The TABs are payable by tax increment revenues generated within the Earthquake Recovery Project Area, net of applicable statutory pass-through payments and county administrative expenses. The TABs are additionally payable from the housing increment revenue. Additional security provisions include a largely cash-funded debt service reserve.
KEY RATING DRIVERS
VERY STRONG DEBT SERVICE COVERAGE: The project area's significant growth in assessed value (AV) since inception has resulted in sustained strong debt service coverage from pledged tax increment revenue and self-sufficient revenue performance under a variety of stress scenarios.
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.
STABLE BUT MODERATELY CONCENTRATED TAX BASE: Over the past six years the project area has experienced modest increases in AV with only one year of decline. The project area covers approximately 35% of the city with the somewhat concentrated leading taxpayer list including a mix of offices, hotels and residences.
DIVERSE, STRONG LOCAL ECONOMY: The diverse and healthy local economy is characterized by unemployment rates slightly above national levels and above average income levels.
SHIFTS IN REVENUE AVAILABLE FOR DEBT SERVICE: The rating is sensitive to shifts in pledged revenue due to tax base changes outside the historical range. Tax base declines that materially reduce pledged revenues could have a negative effect on the rating. Given AV stability and growth trends, Fitch believes such shifts are unlikely in the near term.
The City of Santa Monica (unlimited tax GOs rated 'AAA'; Stable Outlook by Fitch), bordered by the city of Los Angeles on three sides and the Pacific Ocean on the west, encompasses an area slightly greater than eight square miles. Tourism is a key component to the city economy, complemented by a large retail presence. City population growth has been average and stood at roughly 93,000 in 2014.
MATURE, DESIRABLE PROJECT AREA
The project area encompasses much of Santa Monica's commercial and residential base. At 2.9 square miles, the project area includes about 35% of the city and a little less than half of its population. The project area benefits from a desirable location close to the Pacific Ocean, and is within walking distance to Santa Monica's premier shopping and dining establishments. The project area is within a mile of the Santa Monica Pier and the western terminus of the Santa Monica Freeway, which affords easy access to the major cities in the Los Angeles metro area.
Santa Monica has a strong and fairly well balanced economy, with continued growth in the leisure and hospitality sector, as well as entertainment, media, and other information-based businesses. The city's beach access, high quality of life, and abundant recreational opportunities serve to attract affluent visitors and residents. Per capita income levels are well above-average, exceeding 200% of the national average.
GROWING TAX BASE; MODERATE CONCENTRATION
The Earthquake Recovery project area was established in 1994 following the Northridge earthquake and has enjoyed considerable growth since its inception. Leading taxpayers include large office complexes, several resort/hotels and a hospital. Top ten taxpayer concentration is moderate at 18% of AV and 26% of incremental value (IV) in 2015. Fitch considers the project area's vulnerability to natural hazards a credit risk, partially mitigated by its highly desirable location.
The project area has recorded positive AV growth in seven of the last eight years. Total AV is $13.1 billion for fiscal 2015-16, of which $9.3 billion represents incremental value above the base year amount. The sizable incremental value tempers the risk associated with revenue volatility related to AV declines. Total AV has increased at a compound annual growth rate (CAGR) of 5.8% from fiscal 2008 - 2016. New development is likely to be moderate over the near term and valuations remain somewhat vulnerable to declines from pending appeals. Fitch views the Santa Monica market as more stable compared to the Los Angeles metro area as a whole.
STRONG DEBT SERVICE COVERAGE
Debt service coverage is strong and adequately compensates for the moderate taxpayer concentration. Total tax increment revenue generated by the project area in fiscal 2014-15 is estimated by Fitch to cover MADS by more than 9.0x. Fitch estimates MADS coverage of more than 6.8x assuming the loss of the ten largest taxpayers under one stress scenario. Under another stress scenario, a decline of 63% of total AV would still produce enough tax increment revenue to generate 1.0x MADS coverage.
Los Angeles County does not offer the Teeter Program, thereby exposing bondholders to tax collection risk. However, current collections remain very strong, exceeding 95% in each of the last five collection years (Fitch's stress analysis assumes a 95% collection rate). Approximately 459 appeals are currently pending on 125 parcels. Based on historical appeal success rates, an AV loss of $324 million is projected; this value loss is not expected to materially impact coverage levels. Additional credit support is provided by the presence of a mostly cash-funded debt service reserve fund equal to MADS.
REDEVELOPMENT DISSOLUTION - NEUTRAL TO POSITIVE IMPACT
In May 2014 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 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 (AB 1X 26) risks are lessening as management is continuing to adhere to indenture requirements, necessary revenue tracking is in place, and timely and robust continuing disclosure reports are being provided. Since dissolution, the successor agency's procedures to manage dissolution have become well-established, lessening operational risks.
Additional information is available at 'www.fitchratings.com'.
Fitch recently published an exposure draft of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015). The draft includes a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to fewer than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published by Jan. 20, 2016. Once approved, the criteria will be applied immediately to any new issue and surveillance rating review. Fitch anticipates the criteria to be applied to all ratings that fall under the criteria within a 12-month period from the final approval date.
In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from CreditScope.
Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)
Tax-Supported Rating Criteria (pub. 14 Aug 2012)
U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)
Dodd-Frank Rating Information Disclosure Form