The bonds will sell via negotiation on or about the week of
In addition, Fitch affirms the following ratings on bonds issued by the former Pittsburg Redevelopment Agency (former RDA):
The Rating Outlook is Stable.
The senior TABs are secured by a senior lien on all incremental property tax revenues except for former housing set-aside revenues, and by a subordinate lien on the former housing set-aside revenues. The subordinate TABs are secured by a junior lien on the same revenues. The housing TABs are secured by a senior lien on the former housing set-aside revenues.
KEY RATING DRIVERS
VERY STRONG SENIOR COVERAGE: The 'A' rating on the senior TABs reflects very high debt service coverage levels that hold up well to severe hypothetical assessed valuation (AV) losses.
LOW SUBORDINATE COVERAGE LEVELS: The 'BB-' subordinate TAB rating reflects extremely low debt service coverage and variable rate structural risks. Although this front-loaded refunding results in a few years of improved coverage, Fitch conservatively forecasts coverage below 1.0x upon expiration of the savings under a no-growth environment.
LOW TO ADEQUATE HOUSING LIEN COVERAGE: The 'BBB' housing TAB rating reflects low to adequate debt service coverage, and higher tax base concentration levels than the non-housing TABs as former housing revenues are generated by a subset of the total project area.
CASH FLOW RESOLUTION REDUCES SUB RESERVES: The subordinate TABs' LOC-required supplemental debt service reserve fund (supplemental reserve) is expected to be drawn down on a one-time basis to resolve former non-compliance with a cash flow-related indenture requirement. After the drawdown, the subordinate TABs' non-variable rate TAB (the 2004A variable rate TABs are not rated by Fitch) supplemental reserves will be substantially depleted with no replenishment provision.
APPEALS DAMPEN GROWTH PROSPECTS: Although construction is ongoing and residential values have increased substantially over the past year, a large, recently-granted appeal and a significant backlog of commercial appeals will offset related assessed valuation (AV) gains over the short-term.
MIXED PROJECT AREA CHARACTERISTICS: The project area benefits from its very large size, a rebounding housing market, significant new construction, and a high incremental value (IV) to base year ratio, suggesting lower revenue volatility. However, AV fell significantly during the housing-led recession and has not yet shown recovery, the local economy is weighed by high unemployment and low income levels, and taxpayer concentration is high.
TAX BASE PERFORMANCE: The ratings or Outlooks may change, depending on the performance and sustainability of the project area's tax base.
LOC RENEWAL: The subordinate TABs' rating would be downgraded if the agency were unable to renew its LOC at a reasonable cost, leading to material deterioration of the TABs' already weak debt service coverage.
The project area comprises a large 5,750 acres, making up over 70% of the city's fiscal 2014 AV. Although the project area's tax base contains a fair degree of diversification by property type, there is high concentration among the top 10 payers who make up 33% of IV (30% of AV).
FY14 AV FLAT AS ADMINISTRATIVE ERROR, APPEALS OFFSET GAINS
Despite increasing new development and major home price gains, the project area's fiscal 2014 AV gained just 0.3% year-over-year. Management believes AV would have climbed 5% if not for a county administrative error that resulted in a parcel being removed from the project area in fiscal 2014 that had been inadvertently included in fiscal 2013. Also, state-assessed Delta Energy Center, the project area's largest taxpayer, successfully appealed its AV with a
FY15 AV DIFFICULT TO PREDICT DUE TO MIXED DATA
The county has not provided guidance on fiscal 2015 AV levels, which will be subject to significant and countervailing forces. Positive factors include a rapidly recovering housing market, including
These gains will be offset by known and pending appeals and an atypically low 0.45% Prop 13 inflation adjustment for fiscal 2015. Another significant taxpayer,
Fitch's base case AV change for fiscal 2015 is a loss of
OUT-YEAR AV GROWTH POISED TO BENEFIT FROM NEW CONSTRUCTION
AV levels in fiscal 2016 and beyond are likely to benefit from elevated construction levels. New housing construction is proceeding at a pace of about 200 single family homes annually, with an approximate annual value of
The city has approved over 2,500 new housing units within the project area, and expects thousands more given the availability of vacant land and in-fill development opportunities. A portion of anticipated projects are related to a planned Bay Area Rapid Transit rail extension into the project area.
SENIOR TABS ENJOY A VERY STRONG AV CUSHION
Fitch-estimated fiscal 2014 pledged tax increment revenues of
In addition to strong coverage levels, the senior TABs also include a cash-funded debt service reserve fund sized to the
HOUSING TABS HAVE LOW TO ADEQUATE AV CUSHION
Fitch-estimated fiscal 2014 former housing revenues of
The housing TABs' former housing revenues are only generated from sub-project areas 2 and 3, as project area 1 was exempted based on prior redevelopment statutory exemptions and affordability characteristics. As such, the housing TABs' portion of the total project area is smaller than the non-housing TABs, but still adequately sized at nearly 2,000 acres. However, taxpayer concentration is significantly higher at 45% of AV and 47% of IV (30% and 33% for the total project area, respectively).
SUBORDINATE TABS PROJECTED TO HAVE INADEQUATE COVERAGE
Fitch estimates fiscal 2014 net tax increment revenues at
The agency additionally projects interest earnings, loan repayments, and supplemental property tax revenues of
Fitch forecasts coverage of MADS in fiscal 2015 at an extremely low 1.03x, which is boosted significantly with front-loaded interest savings from this refunding. Fiscal 2015 coverage levels are weighed by the impact of AV appeals and a one-time accrued LOC fee of
Fitch estimates that under a conservative no growth and low interest earnings scenario, the agency will add modestly to its reserve levels annually over the next decade due to the availability of interest earnings and other revenues. Under a set of more aggressive assumptions, the agency projects significant annual surplus revenues over the same period.
The subordinate TABs may benefit from the agency beginning to adhere to an indenture requirement to fund its subordinate debt service fund to two year's worth of debt service. Historically the agency had funded to just one year. The agency plans to reach compliance with this requirement over time using surplus revenues. This will allow the agency to retain funds that would otherwise have flowed to overlapping taxing entities, and to build up a larger cash cushion for the benefit of bondholders. The larger sized debt service reserve has been approved by DOF for inclusion on the agency's recognized obligation payment schedule.
CASH FLOW RESOLUTION TO SHRINK SUPPLEMENTAL RESERVE
In addition to the two-year requirement for the subordinate lien TABs, the agency intends to correct its historical non-compliance with a senior TAB indenture requirement that requires tax increment be diverted at the beginning of the bond year in an amount sufficient to pay a full year's worth of senior debt service. Historically the agency executed the requirement on a semi-annual basis instead of the required annual basis. Correcting the cash flow timing issue will negatively affect the subordinate TABs' cash cushion, conservatively projected to result in a
The non-variable rate TABs additionally enjoy standard indenture-required reserves sized to the
SUB TABS EXPOSED TO VARIABLE RATE STRUCTURAL RISKS
Of the subordinate non-housing TABs, 45% are the agency's 2004A variable rate bonds by par value which are not rated by Fitch with a variable-to-fixed rate swap. The variable rate structure leaves all of the parity TABs, including those rated by Fitch, exposed to interest rate risk and a potential termination payment if the swap is terminated. The swap counterparty may terminate the swap if the agency's debt is downgraded to below 'BBB-' by S&P, which is the current rating level. Management estimates the termination payment at roughly
The termination payment would be subordinate to subordinate debt service and all pass-through payments and likely could not be paid based on current debt service coverage levels. As a result, the swap counterparty may not be incentivized to terminate the swap, if the option becomes available. Further, given its subordination to debt service, Fitch would not expect failure to make a termination payment to result in a TAB default.
The agency is also exposed to LOC renewal and fee hike risks, with the LOC scheduled to expire in
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, S&P/Case-Shiller Home Price Index.
--'Tax-Supported Rating Criteria' (
--'U.S. Local Government Tax-Supported Rating Criteria' (
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria
Source: Fitch Ratings
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