SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has assigned the following rating to the Local Building Authority of Salt Lake City, Utah's (the authority) lease revenue bonds:
--$6.8 million, series 2013A at 'AA+'.
The bonds will be sold via negotiation on June 4, 2013. Bond proceeds will be used to finance a new branch library and provide capitalized interest. The series 2013A bonds mature serially on Oct. 15, 2015-2034 and are subject to redemption prior to maturity or in the event of damage, destruction, or condemnation.
The Rating Outlook is Stable.
SECURITY
The lease revenue bonds are secured by Salt Lake City's (the city) lease rental payments to the authority, under an annually-renewable lease.
KEY RATING DRIVERS
RATING LINKED TO GO BOND RATING: The 'AA+' rating on the series 2013A bonds is one notch below the city's GO bond rating, reflecting the requirement to budget and appropriate for debt service. Fitch's 'AAA' rating on the city's general obligation (GO) bonds incorporates the city's diverse and healthy economy, ongoing stable financial operations, substantial financial flexibility, recovery in sales and use tax revenues, and strong debt position.
STEADY PROPERTY TAX REVENUES: Property tax accounts for one-third of the city's general fund revenues and provides a steady source of funding. State law provides for automatic adjustments of tax rates when assessments rise or fall for existing properties, insulating revenues from price volatility in the real estate market.
ASSET ESSENTIALITY AND DEDICATED PROPERTY TAX REVENUES: The new branch library will provide core governmental services, thereby reducing non-appropriation risk. The city will continue to collect dedicated property tax revenues irrespective of any non-appropriation decision.
CONSTRUCTION DELAY RISK: Budgeted capitalized interest includes a six month cushion to offset any construction delays.
NOT SUBJECT TO ABATEMENT: In the event of asset damage, destruction, or condemnation, the city is obligated to make up any shortfalls in the funding for necessary repairs or replacement.
RATING SENSITIVITIES
STABLE CREDIT CHARACTERISTICS: The rating is sensitive to shifts in fundamental credit characteristics including the city's strong financial management practices. The Stable Outlook reflects Fitch's expectation that the city will appropriate the annual lease rental payments for an essential asset and fund fully any necessary facility repairs or replacement and that shifts in fundamental credit characteristics are highly unlikely.
CREDIT PROFILE
Salt Lake City is Utah's capital and the economic and cultural center for the state. Fitch rates the city's GO bonds 'AAA' with a Stable Outlook. The city's economy is diverse, with a stable roster of major employers, and is coming out of the recent recession strongly, reflected in very low unemployment (5.1% in January 2013), the return of both employment opportunities and labor force growth, and strong growth in sales and use tax revenues since fiscal 2011. The city's property market appears to be stabilizing after declines in fiscal years 2010 and 2011, and future growth prospects are good in light of property developments currently underway or due to commence shortly.
The 'AAA' GO bond rating also reflects continued stable financial operations through fiscal 2014, considerable financial flexibility (including plentiful borrowable funds), and a low, rapidly amortizing debt burden. However, the city's socio-economic characteristics are somewhat suppressed in comparison to state and national averages, reflecting the state's most urbanized central city population. For further detail on the city's GO bond rating, please refer to Fitch's Feb. 27, 2013 press release.
NEW BRANCH LIBRARY
The 2013A bonds are being issued to construct a new, approximately 19,000 square foot library in the city's Glendale neighborhood. The $8.9 million project will be funded by the 2013A bond proceeds, to be repaid by city lease rental payments, and almost $2 million in library levy revenues already collected for the project. The construction project schedule aims for substantial completion by fall 2014. Project costs include $350,000 for 24 months of capitalized interest which builds in a six-month cushion against construction delays. The city expects shortly to award a lump sum construction contract competitively; this will cap the project cost at the winning bid amount.
The city's lease rental payments to the authority are subject to annual appropriation on an 'all or nothing' basis. The city covenants to include the lease rental payment in its annual budget. The city intends to fund its annual lease rental payments from a portion of its ad valorem property tax library levy specifically dedicated to new branch library construction. Also pledged are the net proceeds of property and casualty insurance to the extent they are not applied to facility repair or restoration, the net proceeds received from any liquidation, re-letting, or sale of the mortgaged property, and the option price payable by the city if it chooses to exercise its purchase option.
Fitch regards the branch library as an essential asset because it enables provision of core governmental services. Asset essentiality incentivizes the city to appropriate annually the full lease rental payment amounts required to repay the bonds. Fitch's 'AA+' rating, one notch below the city's 'AAA' GO bonds rating, acknowledges that the leased asset's essentiality largely offsets appropriation risk, as does the city's intention to repay the debt using dedicated, though not pledged, property taxation revenues which the city continues to collect irrespective of any non-appropriation decisions.
In the event of damage, destruction, or condemnation, any losses will be borne by the city which must continue to make its full lease rental payments (subject to appropriation) and take the necessary action to repair, rebuild, or replace the affected portion of the leased property. The trustee is required to make available the net proceeds of any insurance policies, performance bonds, or condemnation awards to permit prompt repair or replacement of the damaged property. If such net proceeds are insufficient, the city will make up the difference, for which it is not entitled to be reimbursed by the trustee of bondholders. Alternatively, if the failure to repair, rebuild, or replace does not materially detract from the leased property's value, the city can have the net proceeds used for extraordinary optional redemption of some or all of the bonds, or the city can apply the net proceeds towards purchasing the property outright at the next optional payment date.
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, and 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).
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=790299
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