SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has downgraded the following Banning Redevelopment Agency, CA (the agency) tax allocation bonds (TABs) as part of its surveillance process:
--$30 million TABs, series 2007 to 'BBB' from 'BBB+'.
The Rating Outlook remains Negative.
RATING RATIONALE:
--The downgrade reflects further significant assessed value (AV) decline that has narrowed debt service coverage to low levels.
--The Negative Outlook continues to reflect concerns that the vulnerable tax base may continue to deteriorate significantly, thus potentially pressuring already low debt service coverage levels.
--The rating reflects the project area's maturity, large size, good taxpayer diversification levels, a cash-funded debt service reserve fund, and potential for long-term growth, which are mitigated by low debt service coverage levels.
--The weak economy is characterized by high unemployment, low income levels, a large two-year AV decline, and a strained housing market.
--The governor's proposed fiscal 2012 budget, which seeks to eliminate redevelopment agencies statewide, was not a factor in the rating as under the proposed plan the existing debt and other contractual obligations would be repaid as they come due.
WHAT COULD TRIGGER A DOWNGRADE?:
--Further moderate AV deterioration, which would materially lower debt service coverage levels.
--Evidence of further and material economic deterioration from already weak levels.
SECURITY:
The bonds are secured by tax increment, net of a 20% housing set aside, county charges, and various other statutory senior pass-throughs.
CREDIT SUMMARY:
The city of Banning is located in western Riverside County, 84 miles east of downtown Los Angeles and 23 miles west of Palm Springs. The merged project area is large at 3,283 acres and makes up a significant part of the city, encompassing 22% of the city's land area and 35% of its population of 28,000. The project area's historical AV growth was extremely high due to a large amount of new development and price increases spurred by the city's relative affordability and accessibility to major surrounding employment centers. However, the rapid deterioration of the local and regional housing markets has substantially lowered house prices and halted new developments, causing fiscal 2011 AV to drop by a significant 6.9% (incremental AV fell 9.6%), after an even larger 11.5% decline (15.4%) in fiscal 2010. Management is projecting about a 1% AV increase in fiscal 2012. However, Fitch is concerned that the continued weak housing market may continue to depress AV levels. If AV drops materially from present levels, a downgrade may be triggered.
The project area is well diversified by AV type, consisting of 52% residential, 18% commercial, and 30% industrial and vacant. However, taxpayer concentration is somewhat high, with the top 10 taxpayers making up 12.5% of AV (18% of incremental AV). The tax base is somewhat mature, with an incremental AV to base year AV ratio of 228%, reflecting a relatively low degree of additional revenue volatility caused by AV fluctuations. However, this strength is offset by the limited amount of construction in progress and a likely significant amount of taxpayers under a Proposition 8 AV reduction, which reduces the tax base's Proposition 13 AV cushion.
Debt service coverage of maximum annual debt service (MADS) fell in fiscal 2011 to a somewhat low 1.23 times (x) from 1.36x the year prior. Currently, there is $38.4 million of AV at risk of appeal. If the historical average of 12% of appeal value were granted, AV would fall to 1.21x MADS assuming no other tax base changes. Fitch's base case assumes appeals are granted at the historical average rate and that AV falls by 3% and 2% in fiscal years 2012 and 2013. Under this scenario, Fitch estimates coverage would bottom at a low 1.12x in fiscal 2013. Fitch estimates that a 13% AV decline would result in 1.0x MADS. If coverage fell below 1.0x, management could use alternative revenue sources such as interest income before drawing from the cash-funded debt service reserve fund.
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, LoanPerformance, Inc., IHS Global Insight, and Fiscal Consultant.
Applicable Criteria and Related Research:
'Tax-Supported Rating Criteria', dated Aug. 16, 2010;
'U.S. Local Government Tax-Supported Rating Criteria', dated Oct. 8, 2010.
For information on Build America Bonds, visit 'www.fitchratings.com/BABs'.
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548605
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564566
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