NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed the following tax allocation bonds (TABs) for Vista Community Development Commission, CA (the CDC, or the commission):
--$13.1 million TABs, series 1998 A&B, at 'BBB';
--$11.6 million TABs, series 2001, at 'BBB'.
In addition, the TABs are removed from Rating Watch Negative and assigned a Stable Outlook
SECURITY
The TABs are secured by gross tax increment revenue from the combined project area net of certain senior pass-throughs and the 20% housing set-aside for housing. The TABs are also secured by primarily cash-funded debt service reserve funds.
KEY RATING DRIVERS
REDUCED DEBT SERVICE COVERAGE: The rating reflects lower projected annual debt service coverage following the 2011 issuance of $15.5 million in additional TAB debt coupled with modest project area valuation declines. Annual debt service coverage has fallen from a high 2.84x in 2010 to 1.71x in 2011 inclusive of bond anticipation note (BAN) interest. Coverage is projected to fall to an estimated 1.26x due to a combination of rising debt service and assessed value (AV) pressures.
RATING WATCH NEGATIVE REMOVED: The rating has been removed from Rating Watch Negative based on the fully funded 2012 TAB debt service and Assembly Bill (AB) 1484 payment by the city of Vista (the city) as the successor agency (SA) to the CDC.
REFUNDING UNCERTAINTY: Fitch is concerned about the SA's ability to refinance $24.2 million 2010 non-housing TAB BANs structured with a balloon maturity in fiscal 2017. AB 1484 granted the SA the ability to seek authorization to issue refunding debt; however, Fitch believes execution risks remain. The Stable Outlook reflects the fact that Fitch expects the 'BBB' rating to remain stable over the next one- to two-year period. Refinancing risk associated with the BANs falls outside of the Outlook period and if not resolved, will likely result in longer-term negative rating pressure.
PROGRESS ON AB1X26 IMPLEMENTATION: The SA expects to receive sufficient payments, along with available cash reserves, to cover the 2013 debt service included in the Recognized Payment Schedule (ROPS).
HOUSING REVENUE AVAILABILITY: The CDC has outstanding housing TABs which are not rated by Fitch. The aggregation of housing and non-housing tax increment revenues does not result in materially different coverage on the Fitch rated TABs.
FLAT PROJECT-AREA GROWTH: Over the past four years the original project area has experienced flat to modest declines in AV. This follows an extended period of strong growth. New development activity in the original project area remains sluggish as does a recently added project area which is not yet generating tax increment revenue..
PENDING TAX APPEALS: Current pending valuation appeals are high, offset in part by low historical success rates but could pressure future coverage.
DIVERSE, WEAK LOCAL ECONOMY: The diverse yet somewhat weak local economy is characterized by above-average unemployment and low income levels.
CREDIT PROFILE
The commission was established in 1986 with the purpose of providing tax-base, employment and economic improvement within the city's downtown and central business districts.
IMPACT OF AB 1484
The governor signed AB 1484 into the state's fiscal 2013 budget on June 27, 2012. The bill includes what Fitch believes are improvements to the ROPS approval process and other procedures going forward. However, it required repayment by many SAs of property tax distributions from December 2011 and January 2012 that the state believes should have been directed to other taxing entities.
The SA reports that it made the required AB 1484 payment of $7 million in July 2012 resulting in a reduction of funds available for September 2012 TAB debt service. The SA secured a $1.9 million loan from the city to fully fund September 2012 debt service. The SA has included the city loan amount on its Jan. 1 to June 30, 2013 ROPS request. The loan is subordinate to TAB debt service and the SA expects funds to be sufficient to fully fund 2013 TAB debt service.
SLOWING AV GROWTH
Following significant growth over much of the last decade, AV and related incremental property tax revenue growth within the project area has slowed in recent years. AV has increased from $187.6 million in base year AV to $2 billion AV and $18.4 million in gross tax increment revenue in 2011. Set-aside and pass-through payments average approximately 45%-50% of total annual gross tax increment revenue.
Overall bond debt service coverage for the past five years has averaged a strong 2.50x and above original projections. However, a $15.5 million parity issuance in 2011 coupled with a planned refunding of $24.2 million in outstanding BANs is expected to reduce coverage significantly to an issuer-projected low-point of 1.26x under a conservative zero AV growth scenario.
STABLE ECONOMY
The city (implied unlimited tax GOs rated 'AA' by Fitch) is located in northern San Diego County, 30 miles north of San Diego and about five miles east of Carlsbad and the Pacific Ocean, midway between San Diego and Orange County. The CDC's original redevelopment area was adopted in 1987 with an area of 2,106 acres. Another 1,707 acres were added in 2008. The resulting merged project area is large and mature and makes up a significant part of the city, encompassing 33% of the city's land area.
DIVERSE PROJECT AREA
The original project area's historical AV growth was extremely high. This was due to a large amount of new development and price increases spurred by the development of a modern industrial park and several commercial centers. The new project area adds a significant amount of residential acreage and seeks to improve infrastructure and amenities in some of the lower income sections of the city.
The original project area's predominately commercial and industrial composition experienced significant increases in AV over the past decade. However, there were modest AV declines in fiscal years 2010 and 2011. Additionally, the added area's predominately residential composition has declined by 6.14% and 4% in fiscal years 2010 and 2011, respectively, from its fiscal 2009 base. To date the county assessor has not used the negative increment from the added area to reduce the merged project area increment.
Improvement projects within the added area are on hold until AV growth resumes. The original project area is concentrated by secured AV type with 63% industrial, 22% commercial, and 15% residential and vacant. Taxpayer concentration is somewhat high, with the top 10 taxpayers making up 18% of secured AV (20% of incremental value). The tax base is mature, with an incremental AV-to-base year AV ratio of 960%. This reflects a relatively low degree of additional revenue volatility caused by AV fluctuations. Tax appeals outstanding are high at $364.6 million or 18% of AV and, if granted at historical levels, could decrease assessed value by 4%-5%. AV for 2013 is essentially flat.
REFUNDING UNCERTAINTY
The CDC issued a $24.2 million BAN in 2010 to fund projects in the original project area. While BAN debt service is subordinate to the outstanding tax allocation bonds, the BAN is structured with a balloon maturity in fiscal 2017 and the SA expects to refund the BAN into a TAB in 2016 which would be on parity with the senior TABs. While AB 1484 allows for refunding debt issuances by SAs, Fitch remains concerned with approval and execution risks.
The SA has been in discussions with various officials and anticipates obtaining approval for a refunding by 2016. The refunding also faces execution risks as investor interest is currently uncertain. Inability to achieve the refunding will cause a significant revenue deficiency in 2017 and could impact the SA's ability to pay debt service.
Under various other Fitch-designed stress scenarios, coverage of MADS remains weak yet adequate. Fitch estimates that AV would have to decline 18.5% to result in 1.0x coverage of MADS. The aggregation of housing and non-housing tax increment does not materially change debt service coverage.
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 Fitch's 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, and 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
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314
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Fitch Ratings
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Bernhard Fischer, +1 212-908-9167
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Fitch Inc., One State Street Plaza, New York, NY 10004
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Source: Fitch Ratings