News Column

Fitch Upgrades Milpitas RDA, CA's TABS to 'A+'; Outlook to Positive

June 20, 2014

SAN FRANCISCO--(BUSINESS WIRE)-- Fitch Ratings has upgraded the rating on the former Milpitas Redevelopment Agency (the RDA), CA's bonds as follows:

--$152.1 million tax allocation bonds (TABS), series 2003, to 'A+' from 'A'.

The Rating Outlook is revised to Positive from Stable.

SECURITY

Per the bond indenture, the TABs are secured by net incremental property tax revenues. The revenues are net of the statutory 20% housing set-aside, county administrative fees, statutory pass-through obligations, and any property tax refunds resulting from successful appeals. The debt service reserve requirement is satisfied with an MBIA surety bond.

KEY RATING DRIVERS

SURPLUS HOUSING REVENUES BOOST COVERAGE: The upgrade reflects Fitch's refined analysis of residual housing revenues, which Fitch now considers to be available to pay non-housing TAB debt service. The availability of these revenues materially improves the TABs' debt service coverage (DSC).

POSITIVE OUTLOOK: The Positive Outlook reflects the strong AV growth prospects in the near term which would further increase DSC and the AV cushion.

SOLID AV CUSHION: Maximum annual debt service (MADS) coverage is sound at 2.71 times (x) and is highly resilient to potential AV declines.

ROBUST GROWTH IN TAX BASE; HIGH CONCENTRATION: The project's location in Silicon Valley results in concentration in high technology and above average tax base volatility. Additional exposure to unsecured property amplifies the volatility. Tax base growth in recent years has been robust along with the current strength of the technology sector.

SIGNIFICANT APPEALS ACTIVITY: Pending property tax appeals have declined from prior year levels. However, they remain substantial with requested AV reductions totaling $491 million or 11.1% of incremental assessed value (IV).

ABOVE AVERAGE ECONOMIC INDICATORS: The city of Milpitas' income indicators are well above average, employment growth is robust, unemployment is low and educational attainment exceeds national averages.

RATING SENSITIVITIES

CONTINUED AV GROWTH: Continued AV growth, if not offset by pending appeals, resulting in stronger DSC and AV cushion could result in an upgrade to 'AA-'.

CREDIT PROFILE

The city of Milpitas is located in Santa Clara County, northwest of the city of San Jose. The city's population of about 67,000 has been fairly stable as the city is largely built out. The RDA's sole project area is large at about 2,220 acres, representing 25% of city acreage and including a mix of residential, industrial, commercial and public land uses.

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 1X26). 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 benefited 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.

COVERAGE ENHANCED BY HOUSING REVENUES AND AV GAINS

Estimated coverage of maximum annual debt service (MADS) based on fiscal 2014 revenues (net of senior pass-throughs but including the residual housing set-aside revenues), is about 2.71x. If the 20% housing set-aside were maintained (though there are no housing TABs outstanding), MADS coverage from revenues net of the set-aside would be about 2.10x. Coverage stands up well to various Fitch-designed stress scenarios, including the loss of the top 10 taxpayers. The AV cushion (defined as the one-time reduction in fiscal 2015 AV required to bring MADS coverage to 1.0x) is high at about 72%. Meanwhile the county estimates fiscal 2015 AV growth at about 4.4%.

EXTENSIVE BUT CONCENTRATED TAX BASE

The project area tax base is extensive at $5.2 billion in fiscal 2014 with an IV of $4.4 billion. The strong IV to base year ratio of 5.5x supports below average movement in IV relative to changes in AV. However, an elevated level of unsecured values (22%) representing a substantial amount of manufacturing equipment and a concentrated tax base contribute potential AV volatility. AV declined in fiscals 2011 and 2012 by 2.4% and 4.4%, respectively. This was followed by exceptional growth in fiscal years 2013 and 2014 (11.5% and 9.8%, respectively) reflecting the current expansion in the technology sector.

Taxpayer concentration is moderate (relative to other redevelopment project areas) with the top 10 taxpayers accounting for 19% and 23% of AV and IV, respectively. Cisco, the largest taxpayer, represents 6.7% of fiscal 2013 secured AV. The combined AV of properties under appeal totaled $1 billion (19% of AV) with a requested reduction of $491 million (9.4% of AV). The appeals success rate fell from a high of 27% in fiscal 2009 to 4% in fiscal 2011 and from fiscal 2008-2011 averages about 20%. Despite the declining trend, appeals activity remains elevated with the potential to dampen growth over the near term.

VOLATILE AREA ECONOMY EXPERIENCING ROBUST GROWTH

The area's economic base focuses on the high tech sector, with many employers involved in computer-related manufacturing or software development. Employment levels reflect the inherent volatility of high tech industry falling nearly 5% in 2009 as a result of the deep recession. San Jose-Sunnyvale-Santa Clara metropolitan statistical area (MSA) unemployment rates shot up to over 11% in 2009 and 2010. However, jobless rates have been declining as the industry experiences a healthy recovery. March 2014 year over year employment for the MSA grew by an above average 3.2% compared to 1.9% statewide as most of the leading employers are semiconductor manufacturers or software developers. Unemployment in March was 6.3% compared to 8.4% statewide.

Housing prices have more than fully recovered recessionary losses, with median home prices in November 2013 exceeding the previous peak and increasing 17% over the last year to $731,200, according to Zillow.com. The area is relatively affluent as wealth indices for both city and county residents are well above the state and national benchmarks.

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, and Zillow.com.

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=835694

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

Karen Ribble

Senior Director

+415-732-5611

Fitch Ratings, Inc.

650 California Street, 4th Floor

San Francisco, CA 94108

or

Secondary Analyst

George Stimola

Analyst

+1-212-908-0770

or

Committee Chairperson

Arlene Bohner

Senior Director

+1-212-908-0554

or

Media Relations

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

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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