SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has affirmed the following ratings of Moulton Niguel Water District, California (MNWD; the district):
--$27.8 million consolidated refunding general obligation (GO) bonds series 2003 at 'AA+'.
The Rating Outlook is Stable.
SECURITY
The bonds are payable solely from unlimited ad valorem assessments on all taxable land within MNWD's improvement district (ID) Nos. 6 and 7 (district ID No. 8 debt matured in September 2012). Payments from each ID are a several obligation, thus amounts collected in one ID will not be available to pay the other ID's share of debt service payments. Proceeds from land delinquency sales and certain moneys and earnings from the bonds' funds and accounts are also pledged to debt service.
KEY RATING DRIVERS
WEAK LINK ANALYSIS: The 'AA+' rating is based on a weak-link analysis of the ability of two of MNWD's six improvement districts (IDs No. 6 and No. 7) to levy unlimited ad valorem taxes to repay their respective share of debt service. Fitch views the credit profiles of these two districts as substantially equivalent.
AFFLUENT RESIDENTIAL COMMUNITY: The rating reflects the strong customer base of the two affluent, largely built out and primarily residential improvement districts.
SLOWING TAX BASE DECLINES: Both IDs have experienced steep tax base declines, though the rate of decline has leveled off. Tax rates are adjusted annually by the county based on each ID's debt service needs and assessed valuation (AV).
MANAGEABLE DEBT PROFILE: Both improvement districts have low direct GO debt levels, rapid amortization, and no additional capital needs except for district-wide projects.
STRONG FINANCIAL PERFORMANCE: MNWD's overall financial performance has been very strong with solid debt service coverage levels and well-above-average liquidity despite reliance on costly imported water supplies for 100% of its potable water needs. Fitch rates MNWD's revenue certificates of participation 'AAA'.
LOW RATES: The district enjoys low rates, as property taxes contribute a significant portion of revenues.
RATING SENSITIVITIES
The rating is sensitive to shifts in fundamental credit characteristics including the district's strong financial management practices and strong tax base. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.
CREDIT PROFILE
MNWD provides water, wastewater and recycled water services to approximately 167,000 residents in southern Orange County. Encompassing 36.5 square miles, the district includes the cities of Aliso Viejo, Laguna Niguel, significant portions of Laguna Hills and Mission Viejo and small portions of Dana Point and San Juan Capistrano. Improvement district No. 6 comprises 24.9% of total district land AV and district No. 7 8.6% (2012).
AFFLUENT RESIDENTIAL COMMUNITY
Orange County benefits from a large, diverse and wealthy economic base. Its proximity to the Los Angeles, Riverside and San Diego areas provides ready access to the substantial southern California economy. Additionally, the county has consistently attracted an outsized share of the region's wealth. County and Laguna Niguel wealth levels are high with median household income approximately 44% and 90% above the national average, respectively. Unemployment rates have historically bested those of the region, state, and nation, and continue to do so at 6.8% for the county and 5.3% for the city of Laguna Niguel in December 2012.
SLOWING TAX BASE DECLINES
Home values in Orange County have fared better than most regions nationally. County-wide taxable assessed value (TAV) declined just 1.4% in fiscal 2010 and 0.4% in 2011 before returning to growth in fiscals 2012 and 2013.
District-wide AV levels (land only) declined by a combined 7.7% through fiscal 2011 before increasing by a modest 0.4% in 2012. The district does not participate in the Teeter plan, thus tax revenues are based on actual collections, which can be over 100% because of a 5% delinquency factor included in the tax rate assumptions less any excess funds available from the prior year.
WEAK-LINK ANALYSIS
Fitch rates MNWD's water revenue certificates of participation 'AAA' based on MNWD's pledge of a portion of the broad service area's 1% property tax levy and MNWD net revenues derived from operating the water, recycled water and sewer systems.
The 'AA+' rating on the MNWD's GO bonds issued for IDs No. 6 and 7 reflects the several ULTGO obligations of the two IDs to pay debt service. Fitch's criteria calls for a weak link analysis for several obligations and Fitch views the credit quality of IDs No. 6 and 7 as the same. The bonds were originally issued with debt associated with ID No. 8 as well, but all remaining principal for ID No. 8 matured in September 2012. Each of MNWD's six districts are essentially conduit debt issuers to cover allocated costs of development and maintenance of the respective water and sewer systems.
IMPROVEMENT DISTRICTS BUILT-OUT
The districts securing the bond payments (Nos. 6 and 7) are built out with basically unchanged populations over the past 10 years. The bonds are allocated to each district based on its respective share of improvements, with ID No. 6 responsible for 67% of remaining principal and ID No. 7 responsible for 33%. Tax rates are adjusted for each improvement district by the county on an annual basis to account for any changes in AV, which somewhat mitigates concerns about tax base declines.
ID No. 6 is the larger of the two, comprising about 6,410 acres in the northern portion of MNWD with a population of 49,903. It serves about 29% of total MNWD connections with about 15,673 water and 14,391 sewer connections. ID No. 6 also has the larger AV at $3.6 billion; however, AV declined a combined 11% between fiscal 2009 and 2011 before increasing about 0.5% through fiscal 2013. While it has the higher tax rate, it is still low at 0.13967 per $100 AV. Its current tax collections equaled 98.6% of the levy in fiscal 2013, and when combined with delinquencies equaled 101.1%.
ID No. 7 comprises 1,500 acres in the cities of Laguna Niguel and Dana Point in the southern part of the district closest to the ocean. It serves about 10,325 residents with 3,535 water and 3,285 sewer connections (about 6.5% of total MNWD connections). AV declined a combined 7.4% from fiscal 2009 to 2012 before increasing 0.8% in fiscal 2013. Its current tax collections equaled 98.4% of the levy in fiscal 2013, and when combined with delinquencies equaled 101.1%.
MANAGEABLE IMPROVEMENT DISTRICT DEBT
Within each district, direct GO debt levels are very low and all principal is retired within 10 years. Debt as a percent of TAV is a very low 0.51% for ID No. 6 and 0.19% for ID No. 7 and less than $1 per capita for each district. The remaining debt authorization for each district is as follows: $77.5 million for ID No. 6 and $6.9 million for ID No. 7 ($7 million for ID No. 8).
MNWD anticipates additional district-wide capital needs will be funded with water system revenues and does not expect to issue additional GO debt, which Fitch views as reasonable given that the districts are built-out. Amortization of the GO principal is rapid, maturing in fiscal 2017 for ID No. 6 and 2020 for ID No.7. Overall direct and overlapping MNWD debt is moderate at $2,071 per capita or 2.4% of AV in fiscal 2012.
STRONG FINANCES; LOW RATES
MNWD's overall financial performance has been very strong with ample debt service coverage and very strong liquidity. MNWD's rates are among the lowest in the area. Fitch expects rates to remain low given the diversified revenue base, despite longer term operating pressure as a member of the Metropolitan Water District of Southern California (MWD), given MWD's water supply challenges. For more information on MNWD's operating profile see Fitch Affirms Moulton Niguel Water District, CA's Rev COPs at 'AAA' (Nov., 1, 2012).
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
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:
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
--'Revenue-Supported Rating Criteria (June 12, 2012);
--'U.S. Water and Sewer Revenue Bond Rating Criteria' (Aug 3, 2012);
--'2013 Water and Sewer Medians' (Dec. 4, 2012);
--'2013 Water and Sewer Medians' (Dec. 4, 2012).
Applicable Criteria and Related Research
2013 Water and Sewer Medians
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=695756
U.S. Water and Sewer Revenue Bond Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684901
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=681015
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314
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