AUSTIN, Texas--(BUSINESS WIRE)-- Fitch Ratings has assigned an 'A' rating to the following hotel occupancy tax (HOT) revenue refunding bonds for the City of Galveston, Texas (the city):
--$13.23 million, series 2012A;
--$12.37 million, series 2012B
Fitch has also assigned an 'AA-' rating to the city's $58.2 million in outstanding
general obligation (GO) bonds.
The HOT revenue bonds are expected to price via negotiation the week of Oct. 8, 2012 (pending market conditions). Proceeds will be used to refund for debt service savings the city's outstanding HOT revenue bonds, series 2002 A and 2002 B.
The Rating Outlook is Stable.
The HOT revenue bonds are special limited obligations of the city and are secured by a first lien on HOTs levied within the city. The HOT revenue bonds are additionally secured by a cash funded debt service reserve fund. The HOTs securing the bonds represent 4% of the cost of all hotel room rentals in the city.
The GO bonds and certificates of obligation (COs) are direct obligations of the city. They are secured by an annual ad valorem tax limited to $2.50 per $100 within the limits prescribed by law on all taxable property within the city. The COs are additionally secured by a subordinate lien on the city's sanitation system (series 2003), wharf revenues (series 2004A), and water & sewer system (series 2008).
KEY RATING DRIVERS
SOUND DEBT SERVICE COVERAGE: Coverage of the projected HOT maximum annual debt service (MADS) (post refunding) is sound at more than 2.0 times (x). HOT collections have demonstrated solid growth since Hurricane Ike in 2008. Sound legal provisions provide adequate bondholder protection.
TOURISM GROWTH BOOSTING HOT REVENUES: Investment in the port, theme parks, and hotels has returned sizeable gains in recent HOT tax revenues. Revenues have posted solid historic growth, with more pronounced improvement following the hurricane.
HOT VOLATILITY: HOT revenues are inherently subject to economic sensitivity (further accentuated in Galveston's barrier island location) and high concentration among top HOT contributors.
NO ADDITIONAL LEVERAGING: The city has no near-term borrowing plans for HOT revenues.
ECONOMIC RECOVERY CONTINUES: Galveston suffered severe flooding damage during Hurricane Ike in 2008. Economic recovery continues at a solid pace and is driven primarily by various infrastructure projects and ongoing development of the local tourism industry.
STABLE FINANCIAL PROFILE: The city maintains conservative financial policies and reporting practices. Reserve levels are solid and in compliance with the city's policy targets.
WHAT COULD TRIGGER A RATING ACTION
CONTINUED ECONOMIC GROWTH: Continued growth in HOT revenues from expansion in the local tourism industry and overall economy. This along with completion of recovery-related infrastructure projects could lead to Fitch taking a positive rating action.
UPPER TEXAS COAST COMMUNITY
The city of Galveston is located on Galveston Island approximately 45 miles from Houston in southeast Texas. With a population of approximately 48,500, the city is the county seat of Galveston County (rated 'AA+' by Fitch, stable outlook). Consistent with historical trends, the unemployment rate (8.9% as of August 2012) remains elevated in relation to the state and U.S. averages despite strong recent job growth of 3.9% year-over-year.
The local economy historically has been anchored by the Port of Galveston, healthcare, and tourism. The University of Texas Medical Branch (UTMB) anchors the city's health and education service sector, provides primary health care to indigent Texans, and serves as a teaching hospital and hub for medical research. UTMB has begun construction on a $438 million 13-story hospital to replace a facility damaged by Hurricane Ike. The opening is projected for 2016. UTMP employs 11,568 representing approximately 8% of the county's total employment base.
Oil & gas, petroleum and industrial tenants rely on the Port of Galveston and nearby privately owned Pelican Island maritime and transportation infrastructure for support and cargo transport services. Infrastructure improvements are underway at both locations to support growth in maritime activity anticipated with both expanded cruise operations and the opening of the new locks in the Panama Canal in 2014.
IMPACT OF HURRICANE IKE
Hurricane Ike hit the upper Texas coast in September 2008, resulting in widespread flood damage across the island. The city's population and tourism declined subsequent to the storm, but management reports that 90% of its hotel stock was undamaged due to its proximity to the seawall which extends along the city's beachfront.
Public and private support has infused over $2 billion in disaster recovery monies to the local economy since the storm on a variety of projects. Evidence of the recovery is found in the city's 16% post-hurricane tax base growth (taxable assessed value suffered a 14% storm-related decline and upward adjustments are limited to 10% annually), as well as sales tax growth averaging 5% over the past 2 years.
EXPANDING TOURISM AND HOSPITALITY
The city's burgeoning cruise business is the country's sixth largest and is estimated to bring more than 100,000 visitors a year to the island through the Port of Galveston. The port serves as a home to the Carnival Magic and Triumph cruise ships. Port management recently announced the addition of the Disney Magic cruise ship (September 2012) and return of Princess Cruises' Crown Princess in December 2012. To better accommodate the berthing of three ships at its terminal complex, the Port Development Corporation is investing an estimated $12 million for port improvements on top of sizable investments already made.
The recently opened Pleasure Pier on the city's beachfront leverages the attraction of the city's shoreline. It is expected to draw three million visitors annually. The pier represents a $60 million redevelopment investment by Landry's Inc. in dining, attractions, retail and parking. The city's seawall beautification project (to be completed in February 2013) is expected to draw additional visitors to the island as well.
Management reports that two hotels are currently under construction and expects further additions to its hotel stock based on the combined growth of tourism and increased convention bookings. Fitch considers this a reasonable projection based on recent and ongoing economic activity. Additional hotel development would also help reduce HOT collection risk - currently, the ten largest hotel operators account for 65% of HOT revenue in the city.
The Moody Gardens Hotel generates approximately 20% of HOT revenues. The facility, which includes a spa and convention center, draws an estimated 2 million visitors annually and recently benefited from a $25 million enhancement project.
The Galveston Island Convention Center (140,000 square feet of meeting and convention space) is located on the beachfront and is supplemented by the Moody Garden complex (over 100,000 square feet of combined meeting space). The city's center reports an increase in conventions/meetings scheduled for 2013.
HOT COLLECTIONS, SOUND DEBT COVERAGE
Fiscal year to date HOT collections through August 2012 are 18% higher than the prior fiscal year-to-date period. This reflects a hotel occupancy rate of 65.93% for the eight months ended in August 2012. This figure represents a notable increase from 55% for calendar year 2011. Seasonal occupancy rates approximate 85%.
HOT collections have grown at a sound compound annual growth rate of 3.9% over the past five years, with higher growth of 10.9% since fiscal 2009. Total fiscal 2011 collections of $10.1 million are up 16% from the prior year. Moody Gardens Hotel, The San Luis Condo and Resort, The Wyndham Hotel Galvez, and the Hilton Galveston Island Resort top the list of the city's HOT contributors.
Projected debt service coverage of post-refunding maximum annual debt service (MADS) is healthy at 2.3x based on the most recent 12 months of HOT collections through August 2012. The debt service coverage of MADS performs well under a variety of Fitch stress test scenarios. Fitch notes MADS coverage would remain at 1.0x assuming a decline in HOT revenue of 57% or more than two times the actual revenue decline following Hurricane Ike.
Legal provisions are satisfactory and include an additional bonds test of 1.5x MADS and a standard cash funded debt service reserve fund requirement. Additional leveraging to the ABT requirement, though not anticipated, would likely contribute to negative action on the rating.
SOUND FINANCIAL PROFILE
The city appears to have adequately addressed the operational and financial challenges in the wake of Hurricane Ike. Facing reduced population, revenue streams and service requirements, management since 2008 has worked to 'right-size' operations through staffing reductions and other efficiencies. Management has maintained satisfactory reserves and liquidity since 2008 despite the enormous difficulties associated with recovery.
This prudent fiscal management and conservative budgeting enabled the city to complete fiscal 2011 with an unrestricted general fund balance (committed, assigned and unassigned per GASB 54) of $10.3 million, representing 24.8% of expenditures and transfers out.
The city expects to add several million dollars to fiscal 2012 reserves, reflecting an expected modest operating surplus and proceeds from the sale of city-owned property. A fiscal 2013 balanced budget includes conservative assumptions and an estimated 5% increase in sales tax receipts. Fitch considers these projections reasonable based on recent sales tax performance.
The city's overall debt level, including overlapping debt, is moderate and amortization is above average. Future borrowing plans may include a GO or CO offering in the near future for various infrastructure projects.
The city sponsors three single-employer defined benefit pension plans for city employees, firefighters and police, and acts as a conduit for the provision of retiree health care benefits (at the retiree's cost). Pension funded rates are adequate for the city employee plan, but underfunded for the police and firefighter plans (47.6% and 65.5% respectively, based on Fitch's more conservative 7% investment rate assumption. Fitch notes that the funding rates are premised on an actuarial assumption for projected salary increases which exceeds those currently in place and anticipated in the near term. The city's fixed costs including annual debt service payments and pension contributions represent a moderate 20.9% of fiscal 2011 general fund spending.
Additional information is available at www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in the 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, Zillow.com, National Association of Realtors.
Applicable Criteria and Related Research:
'Tax-Supported Rating Criteria' (Aug. 14, 2012);
'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria
Rebecca Meyer, +1-512-215-3733
Fitch Inc., 111 Congress Ste. 2010, Austin, TX 78701
Steve Murray, +1-512-215-3729
Michael Rinaldi, +1-212-908-1833
Elizabeth Fogerty, +1-212-908-0526
Source: Fitch Ratings