Fitch Rates Syracuse Industrial Development Agency, NY $210.4MM PILOT Bonds 'A-'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned an 'A-' rating to the following Syracuse Industrial Development Agency, New York (SIDA) bonds:

--Approximately $198.1 million tax-exempt refunding payment in lieu of taxes (PILOT) revenue bonds, series 2016A (Carousel Center Project);

--Approximately $12.3 million taxable refunding PILOT revenue bonds, series 2016B (Carousel Center Project).

The bonds are scheduled to sell by negotiation the week of Sept. 26, 2016. The bonds are being issued to refund SIDA's outstanding PILOT revenue bonds, series 2007A (Carousel Center Project) for interest cost savings, and to pay costs of issuance.

Fitch also affirms the following:

--Approximately $322.3 million PILOT revenue bonds, series 2007A and series 2007B (Carousel Center Project) at 'A-'.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by PILOTs on the original or 'legacy' Carousel Center mall payable to SIDA by the Carousel Center Company LP (the 'Carousel Owner') pursuant to a PILOT agreement.

KEY RATING DRIVERS

PILOT LIEN STATUS: PILOT payments are on parity with all governmental fees and charges, all of which are senior to other payment obligations.

SOLID PERFORMING ASSET: The current value of the Carousel Center mall provides a significant cushion in the event the servicer is required to make advances and/or the property is liquidated. Additionally, the mall's net operating cash flow generates a solid debt service coverage ratio (DSCR).

SERVICER A SOURCE OF LIQUIDITY: The mortgage servicer that is required as part of the securitization of the underlying commercial loan on the Carousel Center mall is responsible for providing liquidity, if needed, to cover any shortfalls in PILOTs until mall operations recover or the PILOT lien is foreclosed.

SINGLE-SITE RISK: The PILOTS are subject to concentration risk, as PILOT payments are secured by the obligations of a single income-producing property (the Carousel Center) with one owner.

STRONG TENANCY, OPERATIONS AND MARKET POSITION: With limited competition and easy access, the Carousel Center mall is the premier shopping destination in the Syracuse, NY region. Mall occupancy rates and sales per square foot are strong. The expansion project completed in 2012 contributed to the mall's diversity by the addition of a large entertainment aspect.

BUSINESS RISK/LONG BOND TENOR: Mall operations are exposed to changes to its competitive landscape or other events which hamper viability. The 20-year term of the bonds elevates the likelihood that adverse market developments could erode mall performance.

No Issuer Default Rating (IDR): SIDA does not have material exposure to operation risk. As such, Fitch has not assigned an IDR and there is no related cap on the PILOT bond rating.

RATING SENSITIVITIES

DETERIORATION IN Loan-to-Value (LTV)/DSCR: A material decline in the operations and valuation of the Carousel Center mall would be a concern, as it may serve to diminish the willingness of the servicer to advance PILOTs if needed. Similarly, a material decline in the DSCR (currently over 2x ) could pressure the current rating.

ELIMINATION OF SERVICER ROLE: An unwinding of the commercial loan securitization would be considered a negative credit event and could lead to downward rating movement as the debt service reserve fund would be insufficient to cover PILOTs over an extended period of time. Fitch believes that subsequent lenders are incented to provide an advance mechanism to protect interests that are subordinate to claims of the PILOT bondholders.

CREDIT PROFILE

Opened in 1990 in Syracuse, NY, the original Carousel Center mall is a 1.5 million square foot super-regional shopping center with easy access from Interstate 81, a major north-south road that runs from Tennessee to the Canada/New York border.

An expansion project was completed in 2012 which added approximately 850,000 square feet of gross leasable area (GLA), and is fully integrated with the original mall. The expanded mall has been rebranded to Destiny USA and totals 2.4 million square feet, making it the sixth largest mall in the country. The total Destiny USA mall is 89% occupied as of July 2016. There are no reported plans for additional expansion.

The Carousel Owner is a wholly owned subsidiary of the Pyramid Company of Onondaga, which is part of the Pyramid Companies. Based in Syracuse, NY, Pyramid Companies was established in 1969 and has developed malls across the northeast portion of the U.S.

ADEQUATE BONDHOLDER PROTECTIONS

The obligation of the Carousel Owner to pay the PILOTs is on par only with governmental charges and fees, all of which are senior to any other payment obligations. The requirement of the Carousel Owner to make PILOTs is evidenced by a series of PILOT notes, payable to SIDA and assigned to the PILOT trustee. The bonds are further secured by PILOT mortgages granted by SIDA and the Carousel Owner, encumbering their interests in the existing mall to the PILOT trustee. The mortgages do not extend to the expansion property. The PILOT mortgages impose a lien analogous to liens imposed by taxing authorities, and provide for similar remedies, i.e., foreclosure of property, providing a strong incentive to pay.

Mall tenants are generally contractually obligated to pay the Carousel Owner, as additional rent, an amount allocable to payment of the PILOTs, and payment of the PILOTs by the Carousel Owner is absolute and unconditional, notwithstanding the inability of the Carousel owner to recover this payment from its tenants. Many tenant leases have five- to 10-year expirations.

A non-impairment covenant by the city of Syracuse and New York State prohibits the city and state from altering the rights of the issuer to collect PILOTs.

The debt service reserve fund is equal to approximately 125% of average annual debt service of the PILOT bonds (approximately $30 million). Parity bonds can only be issued as refunding bonds.

CONCENTRATION AND MARKET RISKS

As a single-site property with one owner the mall is subject to concentration risk. This is partly mitigated by the large and diverse number of tenants whose leases include the payment of a proportionate share of the PILOT burden. However, mall performance is also vulnerable to changes in the competitive landscape, including digital commerce. These risks are heightened by the long-term tenor of the PILOT bonds, which extend out to 2036.

PRESENCE OF MORTGAGE SERVICER AS A SOURCE OF LIQUIDITY

Fitch views the presence of a mortgage servicer (Wells Fargo & Company, IDR 'AA-'/Outlook Stable) pursuant to the securitization of the underlying mortgage loan on the mall project as a favorable credit factor. Under the pooling and servicing agreement, the mortgage servicer is required to advance funds when necessary to preserve the security of the mortgage loans. Given the subordinate nature of the underlying commercial mortgage-backed securities mortgage loan to the PILOT bonds, this includes funds to make PILOTs. The obligation to advance applies as long as the servicer (or special servicer) determines that the advances will be repaid. Servicer advances provide temporary cash flow support should pledged funds prove insufficient to cover all PILOTS until such time that either mall performance recovers or the property is foreclosed.

The mortgage loan on the Carousel Center mall along with a $130 million mortgage on the expansion project has been securitized as commercial mortgage pass-through certificates. Both loans are interest only and due in June 2019. Fitch expects the mortgage loans will be rolled over or refinanced before the due date.

The senior obligation of the PILOTs, on par with property taxes, ensures that support funding and any proceeds from foreclosure will be allocated first to the PILOTs before the excess is utilized for underlying mortgage claims.

SOLID PERFORMING ASSET

A July 2016 appraisal of the Carousel Center mall was $500 million. This is down from the appraised value of $550 million in 2006, but up from the $490 million appraised value in 2014. The value of the Carousel Center mall covers total outstanding PILOT debt a solid 1.6x, providing an ample LTV cushion.

SUM SUFFICIENT COVERAGE STRUCTURE

Annual debt service is structured on an ascending basis. Debt service on the bonds totals about $18.4 million in 2016, eventually increasing to about $34.7 million in 2036. In order to service this debt, PILOT payments are scheduled to grow by 4% annually through the final maturity of the bonds. The annual escalation of PILOTs adds pressure upon mall operations, but Fitch believes it to be manageable.

The series 2016A and series 2016B bonds will share a cash-funded debt service reserve fund along with the series 2007B bonds.

STRONG PROPERTY FUNDAMENTALS

Mall operations continue to be solidly supported by the dominant market position of the Carousel Center mall and the broad geographic area from which mall customers are derived. As of July 2016, occupancy for the Carousel Center mall was 88%. This is down from the 93% occupancy recorded at year-end 2015, and is primarily a result of the loss of Bon Ton, a former anchor, in February 2016, as well as the loss of Old Navy and Sports Authority. Sales per square foot as of July 31, 2016 (trailing 12 months) are $599, flat with the level recorded in 2015, also reflecting the loss of the previously mentioned tenants, as well as Gap/Gap Kids. Fitch takes comfort from the Carousel Owner's good history of re-filling vacant space; occupancy at the Carousel Center mall has been above 90% since 2011.

The mall is anchored by nationally recognized stores including Macy's, J.C. Penney, Lord & Taylor and At Home, a new anchor scheduled to open in December 2016, that is leasing the former Sports Authority space. In total, the mall includes over 100 retail tenants, restaurants, entertainment options (including a Regal Movie Theater and a go-kart track) as well as various outlet and discount stores.

With approximately 26 million in annual customer visits, the mall is the dominant shopping center in the area and draws shoppers from Canada. According to management data, approximately 10%-20% of current sales are from Canadian shoppers.

VARIATION FROM PUBLISHED CRITERIA

The analysis supporting the 'A-' PILOT bonds rating includes a variation from the U.S. Tax-Supported Rating Criteria dated April 18, 2016. A variation was made to the dedicated tax bond analysis by incorporating an analysis of the transaction's overall leverage, or LTV cushion, calculated by dividing the total amount of debt by the value of the property. The revenue volatility produced through the Fitch Analytical Sensitivity Tool (FAST) in the analysis of most dedicated tax bonds does not anticipate the specific dedicated revenue stream of a transaction of this type. The dedicated revenue stream is revenues derived from the operations of the Carousel Center. The LTV ratio is being used in order to assess the same analytical point produced by FAST - resilience of the cushion (in this case, Carousel Center operations and appraised value) in the event of a decline.

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

In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from Lumesis and InvestorTools.

Applicable Criteria

U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)

https://www.fitchratings.com/site/re/879478

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1011402

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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
Larry Levitz
Director
+1-212-908-9174
or
Committee Chairperson
Laura Porter
Managing Director
+1-212-908-0575
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@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
Larry Levitz
Director
+1-212-908-9174
or
Committee Chairperson
Laura Porter
Managing Director
+1-212-908-0575
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com