SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA' rating to the following Riverside County Transportation Commission, California (RCTC, or the commission) bonds:
--$415.7 million sales tax revenue bonds (limited tax bonds) 2013 series A.
The bonds will sell via negotiated sale on or about June 25. Proceeds will be used to fund highway improvements and to refund the commission's outstanding commercial paper.
In addition, Fitch affirms the following ratings at 'AA':
--$199 million outstanding limited sales tax revenue bonds;
--$112.4 million outstanding limited sales tax revenue bonds (taxable build America bonds);
--Limited sales tax revenue bank bonds.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by an irrevocable first lien pledge of the countywide 2009 Measure A ? cent sales tax revenues, net of state collection expenses, and swap revenues.
KEY RATING DRIVERS
SOUND DEBT SERVICE COVERAGE: The 'AA' rating reflects sound maximum annual debt service (MADS) coverage at 2.50x based on conservatively budgeted fiscal 2013 pledged sales tax revenues. However, high coverage is offset somewhat by Fitch's expectations of further leveraging over the intermediate term.
ADEQUATE SECURITY STRUCTURE: The bonds' legal provisions are adequate, with a satisfactory 1.50x MADS additional bonds test (ABT) and a first lien on gross revenues, which represent a large and diverse revenue stream that nonetheless has been volatile in recent years. There is no debt service reserve fund, though a notching distinction is not applied at the 'AA' rating level.
DIVERSE ECONOMY IN RECOVERY: The county's economy is large, diverse, and well-situated for growth given its proximity to the Los Angeles and Orange County metro areas with competitive home prices and ample developable land. The housing-led recession severely affected the region, but recent data concerning housing, employment, and sales tax revenues suggest the economy is continuing to recover at a moderate pace.
MINIMAL OPERATIONAL RISKS: The commission acts predominantly as a capital funding and coordination vehicle and does not operate any transit systems. As such, Fitch views the commission as exposed to minimal operating risks.
SOLID COMMUNITY SUPPORT, ESSENTIALITY: The system enjoys a track record of voter support in approving and extending sales tax measures and the commission's debt ceiling. Fitch views the commission's community essentiality as moderate to strong given the region's dependence on highways for economic activity.
SOUND MANAGEMENT PRACTICES: The commission's management team is well tenured and has implemented prudent policies, including a cap on administrative expenditures, full funding of the commission's small other post-employment benefits (OPEB) annually required contribution (ARC), and a sound 2.0x MADS minimum internal coverage requirement on the sales tax revenue bonds.
RATING SENSITIVITIES
The rating is sensitive to shifts in fundamental credit characteristics including the bonds' debt service coverage, the commission's sizeable capital improvement plan, and economic activity. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.
CREDIT PROFILE
The commission oversees funding and coordination of all public transportation services within Riverside County, including Metrolink and various local agencies. With a small administrative staff and a narrow funding and coordination role, RCTC has limited exposure to operational risks from related transit agencies or the commission itself.
ECONOMY CONTINUING TO RECOVER FROM HOUSING-LED RECESSION
The local economy is in its fourth year of employment recovery following severe jobs losses in 2008 and 2009. A substantial amount of job losses occurred in the metropolitan area's construction industry, which today employs about two-thirds of its 2008 workforce, and continued to contract year-over-year through February 2013 despite an uptick in the state's construction industry. Gains in other employment sectors lowered unemployment to a still high 10.9% from 12.7% over the same period. Total employment increased a solid 3.1% (nearly three times the national growth rate) to 849,965, a level nearly equal to the county's 2007 employment base.
Measure A sales tax revenues derive from a large and diverse base and are in their third year of improvement. The recession caused a severe cumulative decline of 27% from 2006-2010, but revenues have increased in each year since hitting bottom. Revenues increased by 8% and 9% in fiscal years 2011 and 2012, respectively. The commission budgeted for a 4.5% sales tax increase in fiscal 2013, but management is estimating a 5.9%-7.4% gain based on actual revenues to date. The recovering economy and recently positive trends in the housing market, if sustained, would bode well for sales tax revenues moving forward.
GOOD DEBT SERVICE COVERAGE; LEVERAGING CONCERNS REMAIN
Budgeted fiscal 2013 net Measure A sales tax revenues of $141 million cover MADS a solid 2.50x (the BABs subsidy on outstanding bonds is treated conservatively as a revenue and not an offset to debt service in all calculations herein). The revenues were budgeted conservatively as noted above, so actual coverage is likely to be somewhat higher. The debt service schedule is level through 2017 at $22 million then jumps to $53 million in 2018 and remains around this level through 2039. Annual debt service (ADS) coverage stands up well under severe scenarios that Fitch does not expect to transpire. ADS coverage could withstand, for example, an annual 3.9% sales tax revenue decline through bond maturity in 2039 with coverage remaining at or above 1.0x in each year. Further, Fitch estimates that sales taxes would need to decline by an extreme 61% for MADS coverage to fall to 1.0x. By comparison, the cumulative four-year sales tax contraction from 2006-2010 amounted to 27.1%.
The 2013 sales tax revenue bonds are secured on parity with other outstanding bonds, including a Build America Bond series that receives a $3 million annual federal interest rate subsidy. Exclusion of this revenue source lowers MADS coverage to a still solid 2.45x from 2.50x. Federal sequestration is estimated to result in an immaterial loss of $129,700 of federal interest subsidies in fiscal 2013. No loss estimate is available for fiscal 2014 if sequestration cuts were to roll into the following fiscal year.
RISKS TO COVERAGE INCLUDE POTENTIAL FURTHER LEVERAGING
Fitch is concerned that the commission's large capital plan may result in further leveraging over the intermediate- to long-term, although no such issuance is currently planned. The commission has a 2.0x internal MADS coverage policy. However, the bonds' 'AA' rating reflects the possibility that the commission would leverage to its legal 1.50x ABT. Fitch does not anticipate that an action to do so would, in isolation, result in a negative rating action.
ISSUANCE LOWERS SHARE OF VARIABLE RATE DEBT
The issuance of the series 2013A bonds lowers the commission's variable rate exposure to a moderate 17% of its debt portfolio from about half due to the refunding of variable rate commercial paper. The variable rate bonds carry a short-term rating of 'F1' based on liquidity provided through a standby purchase agreement with JP Morgan, which expires in September 2014. The commission entered into swap agreements with Deutsche Bank and Bank of America with the intent of creating a synthetic fixed rate. As of June 3, 2013, the termination value of the swaps was a negative $26.1 million.
MIXED ECONOMIC CONDITIONS; LONG-TERM GROWTH POTENTIAL
The populous western portion of the county is within commuting distance to the large economic centers of Los Angeles and Orange counties. Prior to the housing-led recession, population growth was very high, growing from 1.5 million in 2000 to 2.1 million in 2007 and slowing considerably thereafter.
The county's economy is large, diversified, and is well-situated for long-term growth. These strengths are offset, however, by below-average income levels, a distressed housing market that has only recently shown signs of recovery, and a tax base that has contracted significantly since its peak.
County per capita income levels lag the state and nation at 83% and 88% of their averages, respectively. Household income levels are higher, reflective of larger household sizes, and poverty rates are moderate.
The county's housing market was one of the hardest hit in the nation, with average home values falling 55% from their $433,000 peak in 2006 to a trough value of $196,600 in 2012, according to Zillow. These severe price declines caused a cumulative multi-year property tax base contraction of 15.7% from fiscal years 2009?2013. Recently the housing market has showed signs of stabilization, including a year-over-year price gain of 16% through March 2013. Strong valuation performance is reflected in the assessor's preliminary estimate of a 3.5% 2014 assessed value gain.
Pre-recession growth was spurred by the area's housing affordability, ample developable land, proximity to other employment centers, and location along a major distribution route. As the economy and housing market continue to recover, Fitch believes these attributes will continue to drive population growth going forward, though not to the extent of pre-recession years.
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.
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=793370
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