NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the following bonds for Overland Park Development Corporation, Kansas (the corporation):
--$62.685 million outstanding second tier refunding revenue bonds, series 2007B (Overland Park convention center hotel project) at 'BB'.
The Rating Outlook is Stable.
The bonds are special limited obligations payable from a subordinate lien on the net operating revenues of the convention hotel, a senior lien on a 4.5% citywide transient guest tax (TGT), subject to annual appropriation, and a cash funded debt service reserve funded to the IRS standard. The bonds also have a leasehold interest on the convention hotel and a subordinate lien on the 1.5% TGT supporting the superior lien bonds.
KEY RATING DRIVERS
INSUFFICIENT COVERAGE FROM TAX REVENUE: The speculative grade 'BB' rating reflects the below sum-sufficient coverage of maximum annual debt service (MADS) from the dedicated 4.5% portion of the TGT.
NOMINAL CREDIT FOR NON-TAX REVENUE: Fitch gives little weight in its rating to the subordinate pledge of net operating revenue from the single site convention center hotel given its erratic history and the difficulty in quantifying future revenues. Fitch believes at least a portion of the 1.5% tax is likely to be necessary for senior lien debt service, thus not fully available for series 2007B bond repayment.
ASCENDING DEBT SERVICE: Continued revenue growth from the citywide hotel tax and/or operations of the convention center hotel is necessary to sufficiently service the ascending debt service load without using the debt service reserve fund.
STRONG LOCAL ECONOMY: Fitch believes the city's deep and diverse economy supports sustainable long-term hotel demand.
CHANGES IN COVERAGE: Sustained deterioration in TGT collections would present a credit concern and could lead to a rating downgrade. Conversely, increased collections sufficient to demonstrate coverage of MADS by historical pledged revenues and available debt service reserves without use of non-tax revenues could lead to an upgrade to 'BB+'. Improvement leading to MADS coverage consistently in excess of 1x by just historical pledged 4.5% TGT revenues could lead to an upgrade to an investment grade rating.
The corporation is a component unit of the city of Overland Park (GO bonds rated 'AAA' by Fitch), which benefits from its proximity to the Kansas City metro area. The not-for-profit corporation was 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's 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 (IDR rated 'BBB' with a Positive Outlook) 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.
Primary support for the rating is derived from the coverage generated from the first lien on the 4.5% and second lien on the 1.5% citywide TGT imposed upon the roughly 5,300 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 net of a 2% collection fee.
Overland Park has covenanted to budget sufficient citywide hotel tax revenues to pay the next year's debt service on the bonds pursuant to a debt service support agreement between the city and the corporation. However, the allocation of TGT revenues is subject to annual appropriation and is capped at amounts received solely from the 4.5% and 1.5% TGT. Once the city appropriates funds, the obligation is absolute and unconditional without abatement, deduction or set-off and counterclaim.
The bonds also have a subordinate pledge of net revenues from the convention hotel. Fitch gives this pledge little weight. In recent years, net hotel revenues have provided support for the superior lien bonds, thus freeing up much of the additional 1.5% TGT revenues upon which the series 2007B bonds have a subordinate lien. However, the ascending debt service schedule and variability of net hotel revenues make it uncertain that this will continue to the same extent. Debt service on both series of bonds grows at a compound annual rate of about 2.8% through maturity in 2032. Debt service on the Fitch-rated bonds comprises 60% of total debt service.
The commitment of citywide TGT revenues can be released if debt service coverage from net revenues of the convention hotel exceeds 2.25x for three consecutive calendar years. However, these revenues would be reinstated if coverage subsequently fell below 1.75x at any time through maturity. Other legal provisions, which would only provide meaningful credit support 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.
HISTORICAL REVENUES AND COVERAGE
The citywide hotel tax experienced a compounded annual growth rate of 6.1% between 1994 and 2006, but declined notably during the recession, immediately following issuance of the bonds. Revenues have increased each year since 2011, and appear poised for an increase of over 10% for 2015 based on actual data for three quarters.
GROWTH REQUIREMENTS of 4.5% TGT FOR COVERAGE
The ascending debt service schedule makes future coverage by only 4.5% TGT revenues a challenge. In 2014, these revenues alone cover MADS by 0.7x. Annual growth of 2.0% would allow sum-sufficient MADS coverage without use of other pledged sources or the $6.6 million cash-funded debt service reserve. With no revenue growth, the debt service reserve would be exhausted by 2029.
COMBINED PLEDGED REVENUE COVERAGE
The rating does not take into consideration any future benefit of net operating revenues from the convention hotel, and assumes most of the 1.5% TGT will be needed for senior lien debt service. However, actual net operating revenues and other balances have enhanced debt service coverage in recent years. Total pledged revenues including surplus funds after payment of senior lien series 2007A bonds covered series 2007B debt service by 1.67x in 2014. 2014 combined pledged revenues (including net operating revenues) cover MADS in 2032 by 1.0x.
ECONOMY DRIVES FUTURE HOTEL TAX PERFORMANCE
Citywide hotel occupancy historically has been driven by individual and group business travelers. Local demand for hotels wavered somewhat in recent years due to both the protracted economic recession and Sprint Corporation's reduced presence within the city, but has rebounded well. Several small hotels are opening in the area. The city encourages demand by tying economic incentives to hotel usage and a recently constructed soccer/sports complex contributes to hotel demand. Additionally, there are several major economic development projects in the city and surrounding areas. Citywide hotel occupancy increased 2% year-to-date through September 2015, and the average daily room rate is up 4.5%.
STRONG LOCAL ECONOMY
Overland Park is the second largest city in the state of Kansas and located within the Kansas City metropolitan area. The region 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 compared to the national average.
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, IHS Global Insight, and Zillow Group.
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