NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'AA-' rating assigned to the following Santa Monica Redevelopment Agency, California (the agency) tax allocation bonds:
--$41.05 million outstanding earthquake recovery redevelopment project, series 2011 and
--$53.84 million outstanding earthquake recovery redevelopment project, series 2006A at 'AA-'.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by tax increment revenues generated within the Earthquake Recovery Project Area net of the 20% housing set-aside and subordinate to certain statutory pass-through payments to overlapping entities. Additional security provisions include a debt service reserve fund.
KEY RATING DRIVERS
VERY STRONG DEBT SERVICE COVERAGE: The project area's significant growth in assessed value (AV) since inception and low leverage has resulted in sustained strong debt service coverage from pledged tax increment revenue and self-sufficient revenue performance under a variety of stress scenarios.
MODERATE SIZE AND CONCENTRATION: The project area covers approximately 35% of the city with leading taxpayers moderately concentrated including a mix of offices, hotels and residences.
IMPROVING AB1X26 IMPLEMENTATION: The city has been recognized as the successor agency (SA) to the redevelopment agency. The rating incorporates the expectation that the SA will continue its satisfactory implementation of AB1X26 procedures. Several recognized obligation payments schedules (ROPS) have been approved by the oversight board, county and state, and the SA has received timely and sufficient funds to cover tax allocation bond (TAB) debt service in 2012 and 2013. The SA has received a Finding of Completion letter from DOF, acknowledging the successful completion of due diligence reviews.
HOUSING REVENUE AVAILABILITY: The agency has no outstanding housing TABs. The aggregation of housing and non-housing tax increment revenues does not result in materially different coverage on the Fitch rated TABs.
MODEST PROJECT-AREA GROWTH AV: Over the past four years the project area has experienced modest increases in AV with only one year of decline. Project area development activity is moderate.
MODERATE PENDING TAX APPEALS: Current pending valuation appeals are moderate with moderate historical success rates. No significant AV losses are expected.
DIVERSE, STRONG LOCAL ECONOMY: The diverse and strong local economy is characterized by unemployment rates slightly above national levels and above average income levels.
RATING SENSITIVITIES
COVERAGE CHANGES: Significant shifts in AV resulting in meaningful debt service coverage changes could prompt a rating action.
CREDIT PROFILE
The city (unlimited tax GOs rated 'AAA' by Fitch), bordered by the city of Los Angeles on three sides and the Pacific Ocean on the west, encompasses an area slightly greater than eight square miles with a significant residential and commercial base. Tourism is a key component to the city economy complemented by a large retail presence. City population growth has been average and stands at 91,812 in 2012.
IMPACT OF AB 1484
The governor signed AB 1484 into the state's fiscal 2013 budget on June 27, 2012. The bill includes what Fitch believes are improvements to the ROPS approval process and other procedures going forward. However, it required repayment by many SAs of property tax distributions from December 2011 and January 2012 that the state believes should have been directed to other taxing entities.
The SA reports that it made the required AB 1484 payment of $16 million in July 2012 resulting in a reduction of funds but sufficient to meet 2012 TAB debt service. The SA and State Department of Finance agreed to a final settlement amount of $56.8 million, which will be paid in installments starting in January 2014 through July 2015 from existing reserves. Revenues are expected to remain sufficient to cover all TAB debt service in 2014 and 2015.
MATURE, DESIRABLE PROJECT AREA
The project area is part of a vital coastal community, encompassing much of Santa Monica's commercial and residential base. At 2.9 square miles, the project area covers about 35% of city acreage and a little under half of its population. The project area benefits from an extremely desirable location close to the Pacific Ocean, within walking distance to Santa Monica's premier shopping and dining establishments on Main Street. The project area is within a mile of the Santa Monica Pier, and the westerly terminus of the Santa Monica Freeway, which affords easy access to the major cities in the Los Angeles metro area.
Fitch considers the project area's vulnerability to natural hazards a credit risk, partially mitigated by the highly desirable location and tempering the very strong coverage.
Santa Monica has a strong and fairly well balanced economy, with continued growth noted in the leisure and hospitality sector, as well as entertainment, media, and other information-based businesses. The city's beach access, high quality of life, and abundant recreational opportunities serve to attract affluent visitors and residents. Per capita income levels are well above-average, exceeding 200% of the national average.
GROWING TAX BASE; MODERATE CONCENTRATION
The Earthquake Recovery project area has enjoyed positive AV growth in six of the last seven years. Leading taxpayers include large office complexes, several resort/hotels and a hospital. Top ten taxpayer concentration is moderate at 19% of AV and 29% of incremental value (IV) in 2012. Current development activity includes a large mixed use residential development and additional office space.
The project area has experienced a considerable amount of growth since its inception. Total AV is $12 billion for fiscal 2013-14, of which $8.1 billion represents incremental AV over the base year AV. The moderate incremental value serves to temper revenue volatility related to changes in AV. Total AV declined by a relatively modest 0.3% in fiscal 2011, resulting in a 0.5% decline in incremental AV but was followed by solid growth over the past three years. Total AV has increased at a compound annual growth rate (CAGR) of 4.4% from fiscal 2007-2013 with a 7.8% increase for 2014 projected. New development is likely to be moderate and valuations remain somewhat vulnerable to declines from pending appeals. Fitch generally views the Santa Monica market as more stable compared to the Los Angeles metro area as a whole.
Debt service coverage is strong and adequately compensates for the moderate taxpayer concentration. Fitch estimates MADS coverage of over 6.0x following the loss of the ten largest taxpayers.
STRONG DEBT SERVICE COVERAGE
Total tax increment revenue generated by the project area in fiscal 2013 is estimated by Fitch to cover MADS by 8.0x. Based on Fitch's stress analysis, MADS coverage from total tax increment revenue would remain at least 1.0x following the loss of up to 62% of total AV. Los Angeles County does not offer the Teeter Program, thereby exposing bondholders to tax collection risk; however, actual current collections remain very strong, exceeding 96% in each of the prior five collection years (Fitch's stress analysis assumes a 95% collection rate). There are approximately 258 appeals pending on 113 parcels. Based on historical success rates, an AV loss of $503 million is projected and not expected to materially impact coverage levels. Additional credit support is provided by the presence of a mostly cash-funded debt service reserve fund equal to MADS.
LOW DEBT
As of July 1, 2013 there was $75 million in outstanding series 2006 and 2011 bonds, with final maturity occurring July 1, 2042. No additional parity debt is outstanding and no additional can be issued. The project area has approximately $90 million in loans outstanding payable to several banks and the city, which are payable on a subordinate basis to the bonds.
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 and IHS Global Insight.
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=808434
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