News Column

Fitch Places Arizona Sports and Tourism Authority, AZ Revs on Rating Watch Negative

July 1, 2014

AUSTIN, Texas--(BUSINESS WIRE)-- Fitch Ratings has placed the following Arizona Sports and Tourism Authority, AZ (the authority) bonds on Rating Watch Negative:

--$265.5 million senior lien revenue bonds, series 2007A and 2012A currently rated 'A';

--$12.5 million subordinate lien revenue bonds, series 2013 currently rated 'BBB+'.

SECURITY

The senior lien bonds are secured by a first lien on pledged revenues, which consist of a countywide car rental and hotel occupancy tax and facility-related taxes and revenues. The subordinate lien bonds are secured by a subordinate lien on pledged revenues after payment of statutory tourism promotion contributions, indexed 5% per year from a June 2001 base amount of $4 million. There is no debt service reserve fund for the senior bonds, but there is a fully funded debt service reserve fund for the subordinate bonds equal to maximum annual debt service (MADS).

KEY RATING DRIVERS

COURT RULING CREATES UNCERTAINTY: The Negative Watch indicates concern over the potential interruption or cessation of car rental tax revenues, which represent approximately 30% of a narrow and economically sensitive pledged revenue stream.

APPEAL OF COURT RULING: This rating action incorporates Fitch's understanding that the authority and the Arizona Department of Revenue (ADOR) as co-defendant will appeal the court ruling once the judgment is entered by the court. The appeal process could extend over several years.

ONGOING TAX COLLECTIONS: The current rating action also assumes that the authority can continue collection of car rental tax revenues during the appeal process.

RATING SENSITIVITIES

FAVORABLE RESOLUTION OF LITIGATION: Final resolution of litigation pertaining to the legality of pledged revenues in favor of the authority would likely result in removing the ratings from the Negative Watch.

ELIMINATION OF PLEDGED REVENUE: Conversely, resolution that eliminates the car rental tax from pledged revenue, without compensating action by the state of Arizona legislature to replace it with a revenue stream sufficient to satisfactorily cover debt service, could result in ratings dropping to below investment-grade levels.

INTERRUPTION OF TAX REVENUES: The rating would be adversely affected by the interruption of car rental tax collections during the appeal process without compensating action to replace it. A requirement to reimburse taxpayers for previously collected taxes would heighten negative rating pressure.

Credit Profile

On June 16, 2014, the Superior Court of Arizona Maricopa County issued an Under Advisement Ruling stating that because the car rental tax relates to the use and operation of vehicles on the highways and streets of the state, proceeds can only be used for public highways or streets as set forth in the Arizona constitution.

A county-wide lodging (hotel tax) makes up the balance of the authority's tourism tax revenues, together comprising about 60% of fiscal 2013 pledged revenues. The other major revenue source - facility revenue - is composed of certain state income taxes from the Arizona Cardinal professional football operations, sales taxes on retail, restaurants and events, and other facility revenues (e.g. payments from conventions, lease and rental revenues, admissions, and concessions).

Fiscal 2013 revenues cover maximum annual debt service (MADS) in fiscal 2031 at 1.78x-1.68x using normalized revenues, adjusted for a fiscal 2013 nonrecurring car rental tax adjustment. Excluding car rental tax revenues, MADS coverage converges on 1.0x, but reliance on facility revenue for debt service in lieu of the car rental tax revenues would deplete monies otherwise required for stadium operations.

The court's Under Advisement Ruling directed the plaintiffs to submit a form of judgment by July 18, 2014, which the parties will then argue to the court. If the proposed judgment by the plaintiffs includes a proposal to cease collection of the car rental tax, the authority and ADOR will be able to argue for a stay of such proposal. The judge will then enter a final judgment in the ruling, which is expected to occur within approximately 90 days from July 18th. Following the court's final judgment, the authority and ADOR then have 30 days to appeal the ruling and judgment to the State Court of Appeals. Fitch will continue to monitor the litigation as it proceeds. Further commentary on the authority's current rating can be found in Fitch's Feb. 4, 2014 rating action commentary, available at www.fitchratings.com.

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.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 14, 2012);

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012);

--Fitch Affirms Arizona Sports and Tourism Authority Sr Revs 'A'/Sub. Revs 'BBB+'; Outlook Stable (Feb. 4, 2014).

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=837535

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

Rebecca Meyer

Director

+1 512-215-3733

Fitch Ratings, Inc.

111 Congress Avenue

Austin, Texas 78701

or

Secondary Analyst

Steve Murray

Senior Director

+1 512-215-3729

or

Committee Chairperson

Amy Laskey

Managing Director

+1 212-908-0568

or

Media Relations, New York

Elizabeth Fogerty, +1 212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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