News Column

Fitch Affirms Arizona Sports and Tourism Authority Sr Revs 'A'/Sub. Revs 'BBB+'; Outlook Stable

February 7, 2014

Fitch Ratings has affirmed the following ratings on the Arizona Sports and Tourism Authority (the authority), AZ:

--$265.5 million senior lien revenue bonds, series 2007A and 2012A at 'A';

--$12.5 million subordinate lien revenue bonds, series 2013 at 'BBB+'.

The Rating Outlook is Stable.

SECURITY

The senior lien bonds are secured by a first lien on pledged revenues, which consist of a countywide car rental and hotel occupancy tax and facility-related taxes and revenues. The subordinate lien bonds are secured by a subordinate lien on pledged revenues after payment of statutory tourism promotion contributions, indexed 5 percent per year from a June 2001 base amount of $4 million. There is no debt service reserve fund for the senior bonds, but there is a fully funded debt service reserve fund for the subordinate bonds equal to maximum annual debt service (MADS).

KEY RATING DRIVERS

NARROW PLEDGED REVENUES: The primary revenue sources are susceptible to fluctuations in economic conditions. The balance of pledged revenue is even narrower, relying on activity at the stadium.

ADEQUATE DEBT SERVICE COVERAGE: Coverage of the authority's stadium bonds remains adequate for the respective rating levels, despite the economic and revenue challenges of the recent past. Bond indenture provisions include a below-average additional bonds test, although the authority does not anticipate new debt issuance at this time.

POSITIVE ECONOMIC PROSPECTS: The authority participates in the broad and diverse greater Phoenix area economy which has near-term growth prospects. Maricopa County unemployment, income and wealth indicators compare favorably to state and national averages.

REAUTHORIZATION OF TOURISM TAXES: The availability of tourism- related revenues, which account for more than 60 percent of pledged revenue, terminates several years prior to final maturity on the bonds. The sufficiency of facility-related revenue, combined with the potential to pay debt and reauthorization of the tourism taxes somewhat tempers this risk.

RATING SENSITIVITIES

COVERAGE ADEQUACY: The rating is sensitive to downward shifts as well as potential improvement in the authority's debt service coverage.

CREDIT PROFILE

The authority is located in Glendale, Arizona, within Maricopa County. Created as a political subdivision of the state in 2000, the authority was formed to construct, finance, and operate the University of Phoenix Stadium and to promote tourism, major league baseball spring training (the Cactus League), and youth and amateur sports within Maricopa County.

The stadium is home to the National Football League'sArizona Cardinals and the Annual Tostitos Fiesta Bowl. It will host Super Bowl XLIX in 2015 and the College Football Playoff Championship Game in 2016. The stadium also hosts a variety of entertainment, other sporting events, and business events throughout the year.

TOURISM REVENUES REGISTER SOLID GROWTH

Countywide tourism tax revenues contribute about 60 percent of fiscal 2013 pledged revenues and include a car rental surcharge equal to the greater of 3.25 percent of the gross proceeds or gross income from the business or $2.50 imposed on each non-exempt car rental transaction and a 1 percent tax imposed on the cost of each lodging transaction within the county. From the 3.25 percent car rental surcharge, the first $2.50 of revenue goes to the Maricopa County Stadium District (another agency involved with spring training baseball facilities in the county). The tourism tax component of pledged revenues is currently authorized through April 2031.

The authority has an intergovernmental agreement in place with the Maricopa County Stadium District (MCSD), its partner in the Cactus League promotional program, to receive excess rental car surcharge taxes from MCSD. Officials expect to receive about $1.1 million per year from this source over the next six years, projected to increase by $5.5 million beginning in fiscal 2020, coincident with the maturity of MCSD's outstanding debt. The authority plans to use this money for payment toward the various intergovernmental agreements (IGAs) with the local municipalities for the renovation and/or new construction of multiple MLB Spring Training facilities throughout Maricopa County.

Fiscal 2013 tourism tax revenues of $28 million increased for the third consecutive year by a strong 23 percent, reflecting improvement in both hotel tax and car rental receipts, the latter of which included a $2.6 million nonrecurring adjustment. Normalized fiscal 2013 tourism tax revenues of $25.4 million reflect a still strong 11.6 percent year-over-year increase.

Management projects fiscal 2014 tourism tax revenues moderately above fiscal 2013 normalized values based on year-to-date performance. This trend is consistent with regional economic improvements. Nevertheless Fitch expects tourism tax revenues to remain volatile and sensitive to changes in economic conditions over the long-term horizon.

FACILITY REVENUES COVER OUTER-YEAR DEBT 3x

The other major revenue source - facility revenue - is comprised of certain state income taxes from Cardinal operations, sales taxes on retail, restaurant and events, and other facility revenues (e.g. payments from conventions, lease and rental revenues, admissions, and concessions).

Annual debt service drops from $24.6 million in 2031, when the current authorization of tourism-related taxes expire, to roughly $5.5 million from 2032 to 2036. Fitch takes comfort from the fact that fiscal 2013 facility revenue of $16 million equates to 3x the authority's annual debt service scheduled in the outer years of 2032 through 2036. The state legislature may also reauthorize the tourism- related taxes given the economic impact of the stadium and cactus league activities on the region.

SATISFACTORY DEBT SERVICE COVERAGE

Senior lien bond debt service coverage for fiscal 2014, using fiscal 2013 pledged revenues, is sound at 3.3x and subordinate lien bond coverage is satisfactory at 1.75x. Using normalized fiscal 2013 pledged revenues, coverage remains sound at 3.1x for senior and 1.65x for subordinate obligations. Fiscal 2013 revenues cover MADS in fiscal 2031 at 1.78x-1.68x using normalized revenues. A stress case which reduces current revenue by 15 percent still yields MADs coverage of 1.5x-1.43x times using normalized revenues.

The subordinate lien bonds are secured by the same pledged revenues after payment of the senior bonds and required tourism promotion contributions. Fitch takes some comfort from the authority's flexibility regarding annual distributions for other programs, including tourism-related functions (the payment for which occurs prior to subordinate lien debt service in the flow of funds).

The authority's enabling legislation requires pledged revenue distributions (after all debt service) for Cactus League spring baseball training purposes and youth and amateur sports. Remaining revenues after these applications are used for the operational expenses of the facility. Fitch has noted as a concern declining liquidity and reduced revenue for operations over the past several years as revenues shrank.

Management has responded to revenue pressures of the recent past with various spending reductions, the extension of the current facility management company and the current concessions provider through the end of fiscal year 2015 (and after the Super Bowl is held at the stadium). Management conservatively projects break-even or positive operating results within several years as the economy continues to improve. Officials report no problems with minor capital or maintenance needs, which Fitch considers reasonable given the low age of the facility.

BELOW-AVERAGE ADDITIONAL BONDS TEST/NO NEW DEBT PLANNED

The indenture includes a weak additional bond coverage test of 1.3x for senior and 1.15x for subordinate bonds. However, the authority does not plan to issue additional debt in the foreseeable future. Management reports that modest capital needs at the facility will be funded with cash. The authority plans to contribute to area spring training baseball capital projects on a pay-as-you-go basis. The authority also plans to meet its contributions to area spring training baseball capital projects by making annual payments pursuant to the IGAs with local cities.

FAVORABLE MARICOPA COUNTY ECONOMIC INDICATORS

A recovering local economy is evidenced by the improved tourism tax revenues which Fitch notes is consistent with regional sales tax trends. Economic data also indicate an increase in housing starts and improving home prices, albeit at levels significantly below recent peaks.

The county unemployment rate of 6.6 percent as of October 2013 is below state and national levels of 8.0 percent and 7.0 percent, respectively, for the same period. Favorable growth prospects are supported in the near term by an expanding population base, recovering housing market and new electronics and manufacturing sector investments. Governmental, health services and education sector top employers lend stability to the local employment base. Income and wealth levels continue to trend above those of the state and U.S.

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.

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=819515

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