News Column

Fitch Upgrades Belmont Redevelopment Agency, CA's TABs; Outlook Stable

May 22, 2014

SAN FRANCISCO--(BUSINESS WIRE)-- Fitch Ratings has upgraded the following tax allocation bonds (TABs) for the Belmont Redevelopment Agency, California (the agency):

--$8.3 million senior TABs, series 1999A to 'AA-' from 'A+';

--$6.4 million subordinate TABs, series 1999B to 'A+' from 'A'.

The Rating Outlook is Stable

SECURITY

Series 1999A bonds are secured by a senior pledge on incremental tax revenue generated in the sole Los Costanos Community Development Project Area (project area). This is net of the 20% housing set aside, up to an amount equaling 125% of annual debt service.

Series 1999B bonds are secured by a subordinate pledge on incremental tax revenues from the same project area. They are net of the housing set-aside, senior bond debt service, and pass-throughs to education entities, up to an amount equaling 125% of annual debt service.

KEY RATING DRIVERS

CLOSED LIEN ENHANCES SENIOR SECURITY: The upgrade of the senior TABs reflects Fitch's refined analysis of the TAB lien as being effectively closed, thus protecting against future parity leveraging.

SURPLUS HOUSING REVENUES BOOST SUBORDINATE COVERAGE: The upgrade of the subordinate TABs reflects Fitch's refined analysis of surplus housing revenues, which Fitch now considers to be available to pay non-housing TAB debt service. The availability of these revenues, coupled with recent assessed value (AV) gains, materially improve the bonds' debt service coverage.

SOLID TAX BASE: Project area AV has been exceptionally resilient and continued to grow throughout the recession with only one year of decline. The tax base strength is weighed down by moderately high taxpayer concentration and the project area's small size.

STRONG COVERAGE, AMPLE AV CUSHION: Maximum annual debt service (MADS) coverage from pledged revenues is a strong 6.9x for the senior TABs and a solid 3.2x for the subordinate TABs. Both are highly resilient to potential AV declines and other stresses.

ABOVE AVERAGE SOCIO-ECONOMIC CHARACTERISTICS: The city of Belmont (the city) is in the San Francisco Bay Area, benefiting from the dynamic regional economy, above average income and wealth levels, as well as favorable unemployment rates.

SATISFACTORY AB 1X26 IMPLEMENTATION: The rating incorporates the expectation that the agency will continue its satisfactory implementation of AB 1x26 (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. However, given recent AV stabilization and historical concentration, such shifts are unlikely.

CREDIT PROFILE

The city of Belmont (population 26,000) is located approximately 25 miles south of San Francisco and 25 miles north of San Jose. The project area (established in 1982) consists of 560 acres (19% of the city's acreage) and is mostly in the downtown commercial section of the city with good access to highway 101. The project area is roughly 60% residential, 30% commercial, and 10% industrial.

MATURE, WEALTHY COMMUNITY

The project area's steady AV growth during the recession is well supported by the city's high income levels and favorable employment numbers, being an integral part of the dynamic and booming San Francisco Bay Area regional economy.

Median household income level for the city is very high, equivalent to 167% of the state average and 195% of the national average. Average house price is above $1.1 million in the city, indicating high wealth levels. Unemployment rates have been low, most recently at 4.2% in March 2014, compared favorably to the state level of 8.4% and national level of 6.8%. The city's leading employer is Oracle.

Population growth has been slow, and the maturity of the tax base is also reflected in the high incremental value (IV) ($951 million) to base year value ($136 million) ratio of 701%. This results in lower volatility in IV as a result of AV changes.

SOLID TAX BASE, CONCENTRATION AND SIZE CONCERNS

The effect of nationwide housing-led recession has hardly been felt in the project area, which encompasses the city's economically active downtown area. Project area AV only experienced a minor decline (4.1%) in fiscal 2011 and has since continued to grow at a moderate and steady pace resulting in a cumulative gain of 11% as of fiscal 2015. Average house price enjoyed significant increases since late 2011. Recent growth has slowed, but AV is expected to remain steady.

The strength and resilience of the tax base is partly offset by concentration concerns. Top 10 taxpayers comprise a high 31% of the project area's IV as of fiscal 2013, led by office buildings and apartments. The project area is limited in size compared to other Fitch rated project areas, aggravating concentration exposure.

Current outstanding appeals can potentially lower AV by up to $34 million, equivalent to 3% of total project area AV. However, in light of the healthy local real estate market, the appeals are not likely to be granted at the full amounts.

ANALYTICAL REFINEMENT CONSIDERS POSITIVE EFFECTS OF DISSOLUTION

On May 1 Fitch refined its California RDA analysis pertaining to the beneficial impact of dissolution legislation (AB 1X 26). Fitch now considers TAB liens to be closed and surplus housing revenues to be available for non-housing TAB debt service.

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 which 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.

SENIOR TABS UPGRADED DUE TO LIEN CLOSURE, STRONG COVERAGE

The senior TABs current MADS is a strong 6.9x after including 20% housing set-aside revenues. Coverage is also highly resilient to potential AV declines, with an AV cushion (defined by the percentage of one-time AV decline that the tax base is able to withstand while maintaining 1x MADS) of 71%. The effective closure of the senior TAB lien, in combination with the bonds' high debt service coverage for their former rating category, materially improve bondholder protection against future leveraging and are significant factors in the upgrade.

SUB COVERAGE ENHANCED BY HOUSING REVENUES & AV GAINS

The availability of surplus housing revenues for non-housing TAB debt service, together with tax base gains, caused a material enhancement of debt service coverage for the subordinate TABs. MADS coverage improved to 3.2x from 2.3x. The AV cushion also increased to 57% from 50%, based on fiscal 2015 AV. The improvement in AV cushion becomes more pronounced after factoring in recent AV gains. At fiscal 2011 level (the last time Fitch looked at coverage), the AV cushion was 44%. The AV cushion increase to 57% from 44% makes the credit more comparable to higher rated credits, contributing to the basis for the upgrade.

Tax increment revenues are sufficient to sustain other moderate to severe stresses. Both senior and subordinate MADS coverage stays well above 1x under various stress scenarios, such as the loss of top 10 taxpayers, 100% of outstanding appeals loss, and ongoing moderate annual AV declines.

AB 1X26 IMPLEMENTATION AND DEBT MANAGEMENT

The successor agency (SA) has recently and successfully completed the July to December 2014 ROPS with the state Department of Finance (DOF). The SA receives sufficient revenues to pay for all obligations including subordinate pass-through agreements. Due to high debt service coverage, the SA does not experience temporary cash shortfalls caused by the timing difference in receiving incremental property tax revenues and paying for debt service.

The city and the SA are in litigation with the DOF regarding a $1.3 million payment, and the finding of completion letter is pending as a result. This is not expected to impact the TABs.

There is a small amount of housing TABs outstanding (not rated by Fitch) that are due to mature soon. The SA also plans to refund the 1999 series bonds in calendar year 2014.

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:

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=831382

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, +1-415-732-5629

Analyst

Fitch Ratings, Inc.

650 California Street, 4th floor

San Francisco, CA 94108

or

Secondary Analyst

Barbara Ruth Rosenberg, +1-212-908-0731

Director

or

Committee Chairperson

Douglas Scott, +1-512-215-3725

Managing Director

or

Media Relations, New York

Elizabeth Fogerty, +1-212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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