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Fitch Affirms Overland Park Development Corp., KS Bonds at 'BB'; Outlook Stable

January 22, 2014

Fitch Ratings takes the following rating action on Overland Park Development Corp. , Kansas (the corporation): -- $63.9 million outstanding (Overland Park convention center hotel project) second tier refunding revenue bonds, series 2007B affirmed at 'BB'. The Rating Outlook is Stable. SECURITY The bonds are special limited obligations payable solely from a subordinate lien on the net operating revenues of the convention hotel, a senior lien on a 4.5 percent 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 subordinate lien on the net operating revenues and leasehold interest of the convention hotel and the 1.5 percent TGT supporting the superior lien bonds. KEY RATING DRIVERS NOMINAL CREDIT FOR NON-TAX REVENUE: The speculative grade 'BB' rating reflects the inability of the dedicated 4.5 percent portion of the TGT to sustain 1x coverage for debt service. 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. MARGINAL DEBT SERVICE COVERAGE: Total pledged revenues, including those freed up by positive hotel net revenues, provided 1.3x coverage in 2011, 1.2x in 2012 and are projected to provide similar coverage in 2013. ASCENDING DEBT SERVICE: Continued revenue growth from the citywide hotel tax and/or the convention center hotel is necessary to sufficiently service the ascending debt service load. NON-APPROPRIATION RISK: Non-appropriation risk of hotel tax revenues is low relative to the other risks of this credit. Although the convention center hotel is not essential to governmental operations, financial management of the city of Overland Park (rated 'AAA' by Fitch) is strong. STRONG LOCAL ECONOMY: Fitch believes the city's deep and diverse economy supports sustainable long-term hotel demand despite recent weaknesses. RATING SENSITIVITIES CHANGES IN COVERAGE: Sustained deterioration in TGT collections would present a credit concern and could lead to a rating downgrade. Conversely, improvement leading to maximum annual debt service (MADS) coverage consistently in excess of 1x by historical pledged TGT revenues could lead to an upgrade. CREDIT PROFILE The corporation is a component unit of the city of Overland Park, which benefits from its proximity to the Kansas City metro area. It is a not-for-profit corporation 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 (Fitch Issuer Default Rating 'BBB', Outlook Stable) 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. LEGAL STRUCTURE Primary support for the rating is derived from the coverage generated from the first lien on the 4.5 percent and second lien on the 1.5 percent citywide TGT imposed upon the roughly 5,200 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 minus a 2 percent collection fee. Fitch gives little weight to the subordinate pledge of net revenues from the convention hotel. In recent years, net hotel revenues have provided support for the superior lien bonds, freeing up much of the additional 1.5 percent TGT revenues upon which the bonds have a subordinate lien; however, the ascending debt service schedule makes it uncertain that this will continue to the same extent. 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 percent and 1.5 percent TGT. Once the city appropriates funds, the obligation is absolute and unconditional without abatement, deduction or set-off and counterclaim. The commitment of citywide TGT revenues can be released if debt service coverage from net revenues of the convention hotel exceeds a certain threshold; however, these revenues would be reinstated if coverage subsequently fell below 1.75x at any time through maturity. Other legal provisions, which only provide meaningful credit strength 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 percent between 1994 and 2006, and the city in 2007 reasonably forecasted 3.7 percent annual increases between 2007 and 2018. Based on the 2007 forecast, available hotel tax revenues would fully cover annual debt service at least 1.4x throughout the life of the bonds. However, due to the severity of the economic recession, actual TGT revenues declined year-over-year by 17 percent in 2009 and 0.7 percent in 2010 before rebounding in 2011 with a 10.6 percent increase. This was followed by a 4.3 percent rise in 2012; TGT revenues appear poised for a similar increase for 2013, given year-to-date trends. A slight year-over-year decline in the first quarter (1Q) was followed by 11 percent and 24 percent growth in (2Q) and 3Q respectively. GROWTH REQUIREMENTS FOR COVERAGE The ascending debt service schedule makes future coverage by 4.5 percent TGT revenues alone a challenge. The bonds are also supported by a cash funded debt service reserve totaling $6.6 million . If estimated 2013 hotel tax revenues were held flat and no revenues were received from the net operating revenue pledge, the debt service reserve would be exhausted by 2022. Based on Fitch's calculations, 2.6 percent annual growth in citywide hotel tax revenues plus amounts in the debt service reserve would be necessary to sufficiently satisfy debt service in all years, relying only upon the 4.5 percent portion of the TGT. Annual growth of 6 percent for the next five years, followed by more moderate increases, would allow coverage without use of the debt service reserve. COMBINED PLEDGED REVENUES COVERAGE The rating does not take into consideration any future benefit of net operating revenues from the convention hotel. However, actual net operating revenues and other balances have enhanced debt service coverage in recent years. Pledged revenues covered debt service by a positive, but scant 1x in 2011. Coverage improved to 1.2x in 2012 and is projected to be about the same in 2013. Fitch expects coverage will remain pressured as debt service requirements escalate. 2012 combined pledged revenues cover maximum annual debt service maturing in 2032 by 0.7x. 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 Nextel Corp.'s reduced presence within the city. As a positive development, several other major corporations have sublet space on the Sprint campus, which has led to increased hotel demand. The city encourages demand by tying economic incentives to hotel usage and a recently constructed soccer/sports complex contributes to hotel demand. A recent agreement between a local museum and the American Museum of Natural History is also expected to spur growth in occupancy. Citywide hotel occupancy increased 2.4 percent year- to-date through November 2013 , and the average daily room rate is up 2.6 percent. 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 'fitchratings.com '. 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 , National Association of Realtors , Financial Advisor. 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://fitchratings.com/creditdesk/reports/ report_frame.cfm?rpt_id=686015 U.S. Local Government Tax-Supported Rating Criteria http://fitchratings.com/creditdesk/reports/ report_frame.cfm?rpt_id=685314 Additional Disclosure Solicitation Status http://fitchratings.com/gws/en/disclosure/ solicitation?pr_id=815172 ((Comments on this story may be sent to newsdesk@closeupmedia.com ))


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