NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a rating of 'AA' to the following revenue bond to be issued by the Fairfax County Economic Development Authority (VA) (the EDA):
-- $179,260,000 transportation district improvement revenue refunding bonds (Silver Line Phase I Project), series 2016 (pending market conditions).
The bonds will be sold via negotiation on or about March 2. Proceeds will refund certain outstanding maturities of the EDA's transportation district improvement revenue bonds (Silver Line Phase I Project), series 2011 and 2012 for an estimated net present value savings of $12.8 million or 6.8% of refunded par.
In addition, Fitch affirms the 'AA' rating on $223,920,000 of outstanding (pre-refunding) transportation district improvement revenue bonds (Silver Line Phase I Project), series 2011 and 2012.
The Rating Outlook is Stable.
SECURITY
The transportation district improvement revenue bonds are limited obligations of the EDA payable primarily from proceeds of a limited ad valorem property tax (special tax revenues) levied by the county on all taxable commercial and industrial (C&I) zoned property in the Dulles Rail Phase I Transportation Improvement District (TID or district). The obligation to collect and pay to the trustee the special tax revenues is contingent upon the levy and appropriation of such by the county board of supervisors. Bondholders are additionally secured by a cash-funded debt service reserve fund (DSRF) which is funded at maximum annual debt service (MADS). A separate revenue stabilization fund (RSF) is also funded at MADS but can be released under certain conditions.
KEY RATING DRIVERS
GOOD COVERAGE AND LIQUIDITY: Coverage of MADS is estimated by Fitch at 1.45x based on the current actual tax rate and 3.1x at the maximum legal rate. The county targets a minimum coverage ratio of 1.5x calculated with consideration of certain reserves. District reserves inclusive of the DSRF, RSF, and residual fund are reported at $63.1 million in fiscal year 2016 (unaudited) and are well in excess of the county's policy targeting aggregate reserves equal to 2.5x MADS.
TAX RATE FLEXIBILITY: The current special TID tax rate of $0.19 per $100 assessed value (AV) is well within the maximum permissible rate of $0.40, which would allow the county to maintain revenue at a sufficient level to cover debt service in the event of a decline in the value of the TID tax base.
REMOTE LEVERAGE RISK: The county has fulfilled its maximum contribution to the project as outlined in the trust agreement and project agreement. The project is complete and commenced rail service operations in July of 2014. Additional new money bonds may not be issued without an amendment to such documents, which we believe is unlikely to occur.
STRONG BUT CONCENTRATED TAXBASE: The TID contains a significant portion of the county's deep commercial and industrial tax base and has experienced strong growth in valuation since its inception. Taxpayer concentration is declining given new development within the TID but remains high with the 10 largest property owners accounting for close to 26% of AV. The largest property owners include Tysons Corner Property Holdings, Capital One, Federal Home Loan Mortgage Company, and Homart Newco One Inc.
REVENUE SUBJECT TO APPROPRIATION: Levy of the special TID tax is not mandatory but subject to annual appropriation by the Fairfax County Board of Supervisors (Fairfax County's GO bonds are rated 'AAA'). There is strong overlap between the county board of supervisors and the governing body of the TID and the use of special tax revenues is restricted to project financing (including debt service), mitigating risk to appropriation. The county's financial management team, which we view as very strong, oversees the tax levy and collection process, as well as the debt service payments on the TID revenue bonds.
RATING SENSITIVITIES
SPECIAL TAX STABILITY: The rating is sensitive to shifts in pledged special tax revenues, which Fitch believes are unlikely in the foreseeable future given recent stability in the TID tax base, continuing strong rates of tax collection, and significant margin under the maximum legal C&I tax rate.
CREDIT PROFILE
PROJECT AND FUNDING OVERVIEW
The TID was created in 2004 upon the petition of 53% of the commercial and industrial landowners. The petition allows for the levy and collection of a limited real estate tax on all property zoned for commercial and industrial use to fund Fairfax County's $400 million contribution to the $2.9 billion cost of the construction of an 11.5-mile expansion of the regional mass transit system of the Washington Metropolitan Area Transit Authority within Fairfax County (the 'Phase I Dulles Rail Project'). The county's funding contribution to the project has been fully satisfied from proceeds of the EDA's transportation district improvement revenue bonds (Silver Line Phase I Project), series 2011 and 2012 and $131.6 million in equity or pay-as-you-go contributions. Phase I construction is complete and rail service began July of 2014.
The TID is governed by a commission of five members, four of whom are members of the Fairfax County Board of Supervisors and one of whom is the chairman of the Commonwealth Transportation Board or his/her designee. The TID has no taxing power; however, under a project agreement among the county, the EDA, and the TID, the TID agrees to request annually (following the receipt of a certified property valuation) that the county levy and collect special tax revenues in an amount sufficient to pay debt service on the TID revenue bonds. The obligation of the county to levy, collect, and pay any special tax revenue to the trustee is subject to annual appropriation, but the governance overlap between the TID and the county, and the inability of the county to divert the special tax revenues for any purpose other than the Silver Line Phase I Project limit risk to non-appropriation. Special tax revenues are levied, collected, and enforced in the same manner as general county property taxes on a single bill, and all special tax revenues are deposited by the county in the Dulles Rail Phase I TID, a special revenue fund of the county. Tax collection rates are exceptionally strong averaging over 99% since the inception of the TID.
GOOD COVERAGE FROM CURRENT AND MAXIMUM TAX RATE
Special tax revenues are estimated at $24.8 million in fiscal 2017 or 1.45x MADS based on a tax base value of $13.2 billion, tax rate of $0.19 per $100 AV, and a historically conservative 99% collection rate. Without increasing the current tax rate, the TID could sustain a 31% AV loss and MADS coverage would remain 1.0x. This scenario exceeds the total of the 10 largest taxpayers which collectively represent a high 25.7% of AV, or the cumulative 22% loss in AV experienced within the TID between fiscal years 2009-2011. Substituting for the maximum legal tax rate of $0.40, special tax revenues would exceed $52 million or 3.1x MADS, and the TID would be able to withstand the loss of 67% of its tax base before MADS coverage would fall below 1.0x.
TID INCLUDES TYSON'S CORNER SUBMARKET; STRONG GROWTH HISTORY
The TID includes Tysons Corner, the largest of the county's office submarkets with approximately 37 million square feet of office, commercial, and retail space and total employment of 93,000 workers. The TID also includes 23 of Fairfax County's top 50 employers and the corporate headquarters of five of the Fortune 500 - Booz Allen Hamilton, Freddie Mac, SAIC, Capital One, and Gannett. The AV of the TID has grown impressively from $6.8 billion in fiscal 2005 to $13.2 billion in fiscal 2017 or a CAGR of 5.6%. AV increased 10.8% in fiscal 2017, the sixth consecutive year of growth and the strongest single-year gain since fiscal 2008. A strong pipeline of development activity exists with more than 7.7 million square feet of space under construction or approved for development starting in 2016.
The broader Fairfax County economy continues to perform well, benefiting from an established business base of federal contractors and high-tech companies that leverage Fairfax's highly educated labor pool, technology infrastructure, and an extensive transportation network anchored by Washington Dulles International Airport. The Dulles Metrorail expansion project addresses to some extent the significant infrastructure challenges that exist to alleviate congestion and help promote residential development in and around the county's core commercial centers, including Tysons Corner. The county's preliminary December 2015 unemployment rate of 2.8% is considerably lower than the national rate of 4.8% and its median household income of $112,102 is twice the national average. The housing market has exhibited signs of stabilization, but steadily rising commercial vacancy rates reflect the glut of supply in the region and declines in federal government and contractor spending.
FINANCIAL POLICY RESULTS IN STRONG LIQUIDITY
The county's financial policies target an aggregate balance equivalent to 2.5x MADS between the DSRF, RSF, and residual fund. TID reserves in fiscal 2016 totaled $63.1 million or 3.7x MADS. The county plans to release an estimated $14 million of the $28 million held in the residual fund as a source of funds for the proposed refunding. The DSRF is funded at MADS with cash as is the RSF. Under the trust agreement the RSF may be released by the TID when construction of the Phase I Dulles Rail Project is complete and if coverage exceeds 1.5x for three consecutive years. The county has stated it will not elect to release the RSF, since its own financial policy calls for a higher level of reserves. Fitch would anticipate the eventual wind-down of reserves as the bonds near final maturity given the restriction on use for project-related costs.
Additional information is available at 'www.fitchratings.com'.
Fitch recently published exposure drafts of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015 and Exposure Draft: Incorporating Enhanced Recovery Prospects into U.S. Local Tax-Supported Ratings, dated Feb. 2, 2016). The drafts include a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to less than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published in the first quarter of 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 Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from CreditScope, Lumesis and IHS Global Insight.
Applicable Criteria
Exposure Draft: Incorporating Enhanced Recovery Prospects into US Local
Tax-Supported Ratings (pub. 02 Feb 2016)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=875108
Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869942
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=999761
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=999761
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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