News Column

Fitch Affirms Santa Margarita/Dana Point Authority, CA's ID GOs at 'AA+'; Outlook Stable

May 5, 2014

SAN FRANCISCO--(BUSINESS WIRE)-- Fitch Ratings has assigned an 'AA+' rating to the following Santa Margarita/Dana Point Authority, CA (the authority) bonds:

--$65.5 million refunding revenue bonds, series 2014A (Santa Margarita Water District Improvement Districts Nos. 2, 2A, 3, 3A, 4, 4A and 4B general obligation [GO] refunding bonds).

In addition, Fitch affirms the following ratings:

--$26.8 million revenue bonds, series 2009B (Improvement District Nos. 2, 2A, 3 and 4 GO refunding bonds) at 'AA+';

--$36.4 million revenue bonds, series 2009A (Improvement District Nos. 2, 3 and 4 GO bonds) at 'AA+';

--$62.8 million revenue bonds, series 2004A (Improvement District Nos. 3, 3A, 4 and 4A GO bonds) at 'AA+'.

The bonds are to be sold via negotiated sale on June 4, 2014. The new series 2014A bonds will refund the series 2004A bond maturities outstanding from Aug. 1, 2015 onwards.

The Rating Outlook is Stable.

SECURITY

The bonds are special revenue obligations of the authority, payable from unlimited ad valorem taxes on taxable land within improvement districts (IDs) located in the Santa Margarita Water District (the district). Each ID's obligation is several and not joint, and the property tax levy for debt service is allocated among the district's IDs based on the benefit each receives from the bond-financed facilities. Also pledged as security are each ID's share of the countywide 1% property tax levy, proceeds from property foreclosures, and investment earnings.

KEY RATING DRIVERS

ANALYSIS OF INDIVIDUAL IDS: The rating reflects the weakest link among the individual IDs as their obligations are several and not joint. Fitch views ID Nos. 4 and 4B as the least strong due to high overall debt levels and tax base pressure during the recession.

STRONG SERVICE AREA; NO ADDITIONAL DEBT: The district services a largely built-out, affluent residential community demonstrating ongoing property development. No additional debt is planned and amortization is typically rapid.

HEALTHY OPERATIONS: The district's water and sewer operations are financially healthy, with substantial liquidity.

TAX BASE REBOUNDING: The bonds are secured by an ad valorem tax pledge from taxable land only (excluding improvements). After experiencing recession-related land assessed valuation (AV) declines, all IDs' land values increased in fiscal 2014 and are projected to increase further in fiscal 2015.

HIGHER OVERALL DEBT LEVELS: While direct debt levels are low to moderate, overall net debt levels of ID Nos. 3, 4, and 4B are high. However, these high debt levels are mitigated by rapid amortization, limited capital needs, and no additional debt plans.

RATING SENSITIVITIES

Future land AV weakening could pressure the rating given tax base vulnerability during the recession and the tepid recovery to date in most IDs. The rating is also sensitive to shifts in the district's strong financial profile and customer base. The Stable Outlook reflects Fitch's expectation that such shifts are highly unlikely.

CREDIT PROFILE

The district is located in the southeastern portion of Orange County (implied GO bond rating of 'AA+' with a Stable Outlook by Fitch) and is the county's second largest water district, serving about 156,000 customers in a 97-square mile service area. The district comprises 14 IDs (including six sub-IDs) and one community facilities district. These fund water and sewer capital improvements via separate funding obligations. The service area is substantially built out and predominantly residential.

STRONG FINANCIAL PROFILE

The district's water and sewer operating profile is strong, reflecting low customer concentration, limited capital needs, and solid financial performance. Fiscal 2013 ended with a strong cash and investments position of $89.5 million or 560 days of cash, an increase of $1.9 million or 2.2% over the previous year. Of this amount, $59 million was unrestricted and the balance was restricted under board policy for reserves.

Operations are financed by a combination of user fees and property taxes. Operations remained positive after debt service payments throughout the recession, with draws on the rate stabilization fund (RSF) in the latter years (fiscal years 2012 and 2013) to maintain the trend. Fitch considers the district's projected maintenance of the RSF in fiscal 2014 at the current $6 million level (two-thirds of the fiscal 2011 level) to be reasonable given the 2% uptick in water consumption.

The district relies on importing costly water from Metropolitan Water District of Southern California (MWD; water revenue bonds rated 'AA+' with a Stable Outlook by Fitch). The district is currently undertaking a comprehensive rate study looking at structural options to control water consumption, including the ratio of fixed to variable rate fees, tiered billing categories, and conservation-based billing of individual residences. The study is due to be completed in late 2014 or early 2015. Meanwhile, the district continues its practice since 2009 of passing through MWD rate increases and consumer price index adjustments.

WEAK LINK ANALYSIS

Direct debt levels are low for the IDs, while overall debt is high for ID Nos. 3, 4, 4A, and 4B. The district has no plans to issue further debt for these IDs despite $657 million in remaining debt authorization, as most of them are substantially developed and their infrastructure is relatively new. Land AV declined for all IDs during the recession; however, all are beginning to rebound in fiscal 2014, with further increases projected in fiscal 2015. Taxpayer concentration is low in all IDs, and the current total tax collection rate in each ID is over 100%.

Fitch analyzed each of the seven IDs and concluded that ID Nos. 4 and 4B demonstrate relatively lower credit quality for two reasons: high debt and tax base pressure. ID No. 4 has the highest overall debt level at $8,935 per capita and 14% of land AV. ID No. 4B levels are $4,196 per capita and 5.8% of land AV. Between 2010 and 2013, ID No. 4 experienced the most significant land AV loss (approximately 23%). ID No. 4B performed better but had one year of particularly low total tax collections (88% in 2011). Positively, both IDs have rebounded well, with land AV growth outpacing the other IDs. In 2014, land AV grew 7.3% and 8.3% for ID Nos. 4 and 4B respectively. ID No. 4B continues to experience the most property development. Debt amortization is rapid at 78% within 10 years for ID No. 4 and moderate at 47% for ID No. 4B, further mitigating concerns.

STRONG SERVICE AREA

The impact of home value declines on the district has been somewhat mitigated as pledged revenues are based on land AV and not improvements. Compared to state and national levels, county incomes are very high and unemployment is below average at 5.2% as of December 2013. The district serves the communities of Coto de Caza, Rancho Santa Margarita, and San Clemente, which all have extremely high wealth levels and high property values.

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, and 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);

--'U.S. Water and Sewer Revenue Bond Rating Criteria' (July 31, 2013).

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

U.S. Water and Sewer Revenue Bond Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715275

Additional Disclosure

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

Alan Gibson, +1-415-732-7577

Director

Fitch Ratings, Inc.

650 California Street, 4th Floor

San Francisco, CA 94108

or

Secondary Analyst

Yueping Liu, +1-415-732-5629

Analyst

or

Committee Chairperson

Jessalynn Moro, +1-212-908-0608

Managing Director

or

Media Relations

Elizabeth Fogerty, New York, +1-212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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