News Column

Fitch Affirms Redding Redevelopment Agency, California's Market Street TABs at 'A-'

May 22, 2014

SAN FRANCISCO--(BUSINESS WIRE)-- Fitch Ratings has affirmed the rating on the former Redding Redevelopment Agency (the RDA), CA's bonds:

--$3.2 million outstanding Market Street Redevelopment Project tax allocation bonds (TABs) series 2003 at 'A-'.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a senior lien on all tax increment revenues of the Market Street redevelopment project area net of any required set-aside and pass-through payments.

KEY RATING DRIVERS

SOUND AV CUSHION: Maximum annual debt service (MADS) coverage from pledged revenues is a sound 3.8x and is moderately resilient to potential AV declines and weak collections. The impact of such declines on pledged revenue would be magnified given the low ratio of incremental to base year value.

RECOVERING TAX BASE: The project area tax base benefits from recent recoveries and minimal appeals, but is weighed down by high concentration and high incremental value (IV) volatility.

BELOW AVERAGE ECONOMIC INDICATORS: The city of Redding's income and employment indicators are below average. despite it being a regional hub for several counties in northern California.

SATISFACTORY AB1X26 IMPLEMENTATION: The rating incorporates the expectation that the agency will continue its satisfactory implementation of AB1x26 (dissolution legislation) procedures and prioritize the rated debt service payments.

RATING SENSITIVITIES

AV STABILIZATION: The rating is sensitive primarily to shifts in AV and concentration.

CREDIT PROFILE

The city of Redding (population approximately 90,000 in 2011) is located 160 miles north of Sacramento in Shasta County and serves as a regional commercial, retail and medical hub for the northern California counties of Shasta, Tehama and Trinity (combined population of over 255,000 in 2012). Leading local employers include the city and county governments, as well as several medical facilities. The local unemployment rate has been trending downward as the economy recovers. However, at 9.5% in March 2014, it was still above the state average of 8.4%. Median household income is below average at 70% and 82% of state and national levels respectively.

The incremental property tax revenue collections are not part of the county's guarantee of property taxes (teeter plan). Recent collection rates have been strong, with delinquency rates dropping to around 2% for all project areas. However, Fitch conservatively uses the highest historical delinquency rates (around 4%) in its coverage calculations.

PROJECT AREA WITH CONCENTRATION AND INHERENT VOLATILITY

The Market Street project area, originally formed in 1968 and expanded in 1990 encompasses 2,591 acres, or 7% of the city acreage. The project area is largely built out and was created to promote new and support existing development in the city's downtown area including beautification, recreation, park and public improvements.

Tax base growth since incorporation has been relatively limited despite the long history. Incremental value (IV) ($322 million) to base year value ($279 million) ratio is low at 115%, indicating high inherent volatility in IV as a result of AV changes. As an illustration, AV is currently 16% below the peak, while IV is 26% under. Consequently, tax increment revenues are more volatile than AV changes.

The tax base is highly concentrated in the top 10 (41% of IV), due to a single significant taxpayer, MPT of Shasta LP (20% of IV), which is the Shasta Regional Medical Center.

RECENT AV RECOVERY, MINIMAL APPEALS

Project area AV rebounded for the first time since the recession by 2.4% in fiscal 2014. Continued AV stabilization is likely. The project area AV trend generally follows the city's and commercial and residential real estate market recoveries have been happening throughout the city. Zillow indicates a year-over-year house price increase of 13% in the city, after reaching the trough in 2012.

Current outstanding appeals have minimal value at risk of $2 million, or less than 0.5% of total project area AV, as a result of county-wide proposition 8 adjustments in recent years.

ANALYTICAL REFINEMENT CONSIDERS POSITIVE EFFECTS OF DISSOLUTION

On May 1, Fitch announced it would refine its California RDA analysis pertaining to the beneficial impact of dissolution legislation (AB 1X 26). Fitch now incorporates the closure of TAB liens and availability of surplus housing revenues for non-housing TAB debt service in its analysis. Although Fitch views these factors as positive credit characteristics, they were not sufficiently material to result in a positive rating action for the TABs.

Fitch formerly excluded positive dissolution factors from consideration, reflecting a conservative approach to a dissolution environment marked by legislative, administrative, and judicial uncertainty. Two-and-a-half years and six recognized obligation payments schedule (ROPS) cycles have passed since dissolution. During that time, the factors have benefitted TAB credit quality with no successful legal challenges to date. Although uncertainties remain, Fitch views the continued presence of closed TAB liens and surplus housing revenue availability as more likely than not to remain a feature of California TABs.

ENHANCED DEBT SERVICE COVERAGE DOES NOT AFFECT THE RATING

Current MADS improved to 3.7x from 2.3x after including 20% housing set-aside revenues. Similarly, AV cushion (defined by the percentage of one-time AV decline that the tax base is able to withstand while maintaining 1x MADS) increased to 39% from 31% as a result. Although these changes are notable, they are not sufficient to offset other risks, and overall credit characteristics remain comparable to other similar 'A-' credits.

Tax increment revenues are sufficient to sustain other moderate stresses. MADS stay well above 1x under various stress scenarios, such as the loss of top 10 taxpayers, 100% of outstanding appeals loss, increased delinquency rates, and a repeat of the AV declines experienced in fiscal years 2011 and 2012.

AB 1X26 IMPLEMENTATION

The SA recently completed the July to December 2014 ROPS with the state Department of Finance (DOF). The SA continues to put reserves on ROPS to bridge the timing difference between receiving incremental property tax revenues and paying for debt service, such that short-term cash flow loans are not needed. It continues to rely on the information provided by the county auditor-controller to track revenues by project area and pay debt service accordingly. In addition, the project area does not have any housing bonds.

The SA has received the Finding of Completion Letter from the DOF, signaling that it does not owe any amount following the two county due diligence reviews or the true-up process, and is ready to move to the next steps in the dissolution process, such as selling former RDA properties.

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, and Zillow.

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=831385

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

Yueping Liu

Analyst

+1-415-732-5629

Fitch Ratings, Inc.

650 California Street, Fourth Floor

San Francisco, CA 94108

or

Secondary Analyst

Karen Ribble

Senior Director

+1-415-732-5611

or

Committee Chairperson

Amy Laskey

Managing Director

+1-212-908-0568

or

Media Relations

Elizabeth Fogerty, +1-212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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