News Column

Fitch Rates Orlando, FL's Contract TDT Payment Revs 'AA+'; Outlook Stable

February 13, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has assigned an 'AA+' rating to the following Orlando, Florida (the city) bonds:

--$236.1 million contract tourist development tax payments revenue bonds, series 2014A (contract TDT bonds).

The bonds are expected to sell in early to mid-March via negotiated sale. Bond proceeds will be used to fund construction of a major league soccer stadium, a portion of the performing arts center, and renovation of the Citrus Bowl.

In addition, Fitch affirms the following ratings:

--Implied general obligation (GO) at 'AAA';

--$200.1 million outstanding capital improvement revenue bonds at 'AA+'.

The Rating Outlook is Stable.

SECURITY

The TDT bonds are initially secured by county tourist development tax (TDT) revenues distributed to the trustee each year on January 15th (contract TDT revenues). The county's obligation is limited to the first four cents of TDT collections net of the base year amount. The base year amount was set in 2005 and escalates by 2% annually. The base year amount is then reduced by an amount equal to that year's collections of the fifth cent TDT.

Additional security is provided by two bond funded reserve accounts: a liquidity account (50% of maximum annual debt service - MADS), and a debt service reserve fund (50% of MADS). The indenture also establishes an additional reserve at issuance (the community redevelopment agency (CRA) reserve) of $25 million funded by the city and the CRA.

As a back-up if contract TDT revenues and bond and CRA reserves are insufficient, the city covenants to budget and appropriate (CB&A) in its annual budget, by amendment if necessary, legally available non-ad valorem revenues (covenant revenues) sufficient with other pledged funds to pay debt service on the bonds. The availability of covenant revenues to pay debt service is subordinate to the funding of essential government services and obligations with a specific lien on non-ad valorem revenues. Such a covenant is cumulative to the extent not paid, and continues until all required amounts payable under the indenture have been paid.

KEY RATING DRIVERS

CB&A PROVIDES ULTIMATE SECURITY: The city's pledge to covenant to budget and appropriate serves as the ultimate backstop to bond repayment and the basis for the 'AA+' rating. The pledge is supported by a diverse and extensive covenant revenue base which provides strong coverage of MADS on the city's parity non-ad valorem-secured debt.

HIGHLY LEVERAGED CONTRACT TDT REVENUES: The city intends to pay debt service with contract TDT revenues, which are highly leveraged due to elevated base year levels. Additional contract TDT growth will be required to meet full debt service once ramp-up is completed in 2018. Extensive reserves provide some mitigation but prolonged declines in pledged TDT revenues would eventually deplete reserves and trigger the city's CB&A pledge.

IMPLIED GO RATING: The city's 'AAA' implied GO rating reflects its solid finances, high but manageable debt levels and an expanding and diversifying economic base.

WORLD-RENOWN TOURIST DESTINATION: The city and environs include Disney World, Universal Theme Park and numerous other attractions making it one of the top tourist destinations in the world. Large and ongoing investments by Disney and Universal in their respective theme parks are expected to promote continued high levels of visitations.

STRONG CITY FINANCIAL PERFORMANCE: City finances are well-managed as demonstrated by strong reserves, ample liquidity, a diverse revenue base and conservative budgeting.

STRENGTHENED AND DIVERSIFYING LOCAL ECONOMY: Local economic activity has surged over the past three years with the recovery in tourism. Significant health science-related development provides diversification away from the volatile tourist sector.

ELEVATED BUT MANAGEABLE DEBT: Debt per capita is elevated, but debt to taxable assessed value (TAV) is more moderate. Given no new debt planned and slow amortization, debt levels are expected to remain elevated for some time.

RATING SENSITIVITIES

DETERIORATION OF FINANCIAL RESERVES: Significant operating deficits bringing general fund balance below the lower end of the city's fund balance target would be viewed unfavorably by Fitch.

NARROWED COVENANT DEBT COVERAGE: Reduced coverage of covenant debt, either through declines in covenant revenues and/or additional leverage could lead to negative rating action on the city's covenant bonds and the implied GO.

CREDIT PROFILE

BROAD COVENANT REVENUE BASE

The rating reflects the city's covenant to budget and appropriate pledge which serves as the ultimate backstop for debt service. Covenant revenues, which are derived from the city's two major unrestricted funds (the general fund and utility services tax fund) are extensive and diverse. Covenant revenues totaled over $243 million in fiscal 2013. The largest source of covenant revenues consists of contributions to the general fund from the Orlando Utilities Commission (OUC - revenue bonds rated 'AA' with Stable Outlook). OUC operates the city's electric and water utility with OUC's contributions to the general fund consisting of a franchise equivalent fee and a dividend payment estimated at $76.4 million in fiscal 2013 or 31% of total covenant revenues. This revenue stream has been relatively consistent since at least fiscal 2009. Other important covenant revenues include utilities services taxes, franchise fees and the city's share of state sales tax distributions. Since fiscal 2009, covenant revenue trends have been generally upward rising in fiscals 2012 and 2013 (unaudited) bolstered by increased emergency medical service (EMS) fees as a result of the city takeover of EMS services from an outside provider.

SOLID COVERAGE OF COVENANT DEBT SERVICE

Approximately $380 million of city obligations are secured by covenant revenues, in addition to the current offering. Coverage of MADS on all covenant debt including the proposed bonds is ample at 5.0 times (x), conservatively assuming that no contract TDT revenues are available for debt service and bond reserves are depleted. Coverage remains ample at 2.0x when taking essential expenditures (executive office expenditures, fire and police spending) into consideration.

The city's covenant bond ordinance limits issuance of additional debt either directly secured by covenant revenues or the CB&A pledge serves as a backup security and the primary revenue source fails to provide adequate debt service coverage. Covenant debt service is restricted to no more than 25% of covenant revenues if MADS falls within the first six years after issuance or 35% of covenant revenues if MADS occurs beyond the first six year following issuance. The proposed contract TDT bonds comfortably meet the requirements of the additional bonds test.

LEVERAGED AND VOLATILE PRIMARY REPAYMENT SOURCE

The city intends that contract TDT revenues will be the primary source for bond repayment. Contract TDT revenues represent an incremental revenue stream generated only when TDT revenues exceed the base amount. The contract TDT is significantly leveraged and highly volatile. Base year levels equaled an exceptionally high 90.6% of total TDT revenues in fiscal 2013. An escalating base amount increasing by 2% each year amplifies the risk of a contract TDT revenue shortfall.

Estimated fiscal 2014 contract TDT revenues of $13.5 million cover estimated fiscal 2014 debt service of $11.9 about 1.1x. However, debt service escalates until leveling out at about $16 million beginning in fiscal 2018. As a result, additional revenue growth is required to cover debt service after ramp-up. Fiscal 2013 contract TDT revenues of $11.7 million represent only about 73% of projected MADS of $16 million. Sizable bond reserves, including a liquidity reserve and debt service reserve account which combined equal MADS and an additional $25 million reserve equivalent to 1.5x MADS, provide some offset to revenue volatility. Even with the added protections, a prolonged fall-off in TDT collections would almost certainly lead to reserve depletion and reliance on covenant revenues and could result in negative pressure on the city's implied GO and covenant bond ratings.

STRONG FINANCIAL MANAGEMENT

City finances are well-maintained characterized by sizable reserve levels, tight controls over spending and favorable actual performance to budget. Fiscal 2012 unrestricted general fund balance totaled $125.6 million or a very healthy 36% of expenditures.

The city reported four consecutive years of operating surpluses between fiscals 2009 and 2012 which grew the city's total general fund balance by $57 million or nearly 80% to $129 million, or 37% of general fund spending. The positive results were a function of tight spending controls (since fiscal 2008 the city reduced its workforce by 300 positions and streamlined operations) and a larger than usual transfer of utility taxes into the general fund in fiscal 2011 in order to utilize accumulated balances in the utilities services tax fund.

PLANNED DRAWDOWNS OF LARGE BALANCES

Officials decided to tap a portion of recently built up general fund reserves in fiscal 2013, budgeting a $29.5 million drawdown. The budget provided a 3% salary increase to employees, the first in three fiscal years. Property taxes grew marginally with an uptick in taxable values. Property tax rates have been maintained at 5.65 mills since fiscal 2009. Unaudited results show a better than budgeted $22 million year-end drawdown reducing overall fund balance to $107 million and estimated unrestricted general fund balance to $103.8 million or a still ample 27.6% of spending. Fund balance remains above the city's target of 15% to 25% of next year's budget.

The fiscal 2014 budget proposes an additional $29.5 million drawdown of general fund balance. Property tax revenues are anticipated to increase for the second consecutive year due to more moderate growth in taxable values. Employees were granted an additional 2% wage rise and additional funding is provided for a land purchase. Even if the entire $29.5 million drawdown is realized, unrestricted balance would still be maintained within the reserve target at 20% of expenditures. However, actual results typically outperform the city's conservative budgets. Fitch will monitor the city's financial performance with the expectation that future city budgets will trend towards structural balance.

HIGH DEBT COSTS MITIGATED BY LARGE TDT-SECURED BOND PRESENCE

City debt levels are moderate when compared with market value but high on a per capita basis at $6,796. Carrying costs of debt, pension contributions and OPEB payments for fiscal 2012 were elevated at over 27% of spending and will further rise with the current issue. Some mitigation is provided by the fact that nearly half of outstanding direct debt is secured by TDT revenues which are mostly paid by visitors. Principal amortization of city debt is slow with only 28% of principal retired within the next 10 years. Capital needs are manageable with the fiscal 2014-2018 capital improvement plan totaling $238 million. Additional debt plans includes $50 million for an police department headquarters and $17 million for energy efficiency projects.

ADEQUATELY-FUNDED PENSION OBLIGATIONS

The city maintains three separate single-employer defined benefit pension plans (police officers, firefighters and general employees). The general employees defined benefit plan was replaced with a defined contribution plan for employees hired after 1998. The city consistently funds 100% of the required contribution each year. All defined benefit plans are satisfactorily-funded with funding ratios of 71%, 74% and 72% for the general employees, firefighters and police officers' plans, respectively assuming Fitch's 7% discount rate.

For post-employment benefits (OPEBs), the city provides two single employer plans; a defined benefit plan and a defined contribution retiree healthcare expense reimbursement option. General employees hired after 2006 are offered an implicit subsidy while fire and police employees hired after 2006 must participate in the defined contribution plan. The city established an OPEB trust and contributes 100% of cost each year. The funding ratio is low at 16% assuming the 7% discount rate but is higher than funding levels of many other municipalities.

CENTRAL FLORIDA ECONOMY STRENGTHENS

The local economy continues to expand and diversify. Employment levels have increased steadily since 2011 and were up 2.2% in October 2013 on a year over year basis. The city's October 2013 unemployment rate of 5.7% was lower than the state and national rates of 6.6% and 7%, respectively.

Taxable values gained 3.4% in fiscal 2014, the second consecutive increase after three years of decline, attributable to a combination of higher residential values and reduced homestead exemptions. Median November 2013 home values are up 24% over the prior year according to Zillow.com suggesting future tax base growth.

The leisure and hospitality sector continues to be a major component of the local economy, comprising about 21% of total employment. Disney is the dominant player, employing about 58,000 or about 10% of total county employment. Universal Orlando reports 13,000 employees while SeaWorld of Orlando's workforce consists of approximately 7,000. Beside growing theme park attendance and TDT collections, expanding occupancy and hotel room rates are indicative of the strong recovery within this sector.

EXPANDING BIOTECH AND LIFE SCIENCE HUB

Economic diversification has occurred most notably within the education and health services sectors. A growing biotechnology and life sciences cluster is centered in Lake Nona Medical City, a master planned mixed community within Orlando. Lake Nona is anchored by The University of Central Florida's (UCF) Health Sciences Campus, which is home to its College of Medicine and the Burnett College of Biomedical Sciences, the M.D. Anderson Cancer Center and the Sanford-Burnham Medical Research Institute. Other Lake Nona medical facilities are recently opened Nemours Children's and a new Veteran's Administration hospital. Significant additional residential and commercial development throughout the city points towards ongoing near term growth.

Additional information is available at 'www.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,

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=820550

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Fitch Ratings

Primary Analyst

Larry Levitz, +1-212-908-9174

Director

Fitch Ratings, Inc.

One State Street Plaza

New York, NY 10004

or

Secondary Analyst

Michael Rinaldi, +1-212-908-0833

Senior Director

or

Committee Chairperson

Karen Ribble, +1-415-732-5611

Senior Director

or

Media Relations

Elizabeth Fogerty, +1 212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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