SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has affirmed Atwater Redevelopment Agency, California's (the agency) tax allocation bonds (TABs) at 'BBB+' as follows:
--$8.1 million TABs series 1998A and 2007A;
--$1.8 million Housing TABs series 2007B.
The Rating Outlook is Stable.
SECURITY
The non-housing series 1998A and 2007A TABs are secured by gross tax increment within the sole project area, net of the 20% housing set-aside and county administrative fee. The housing TABs are secured by the 20% housing set aside. The debt service reserve requirement is being met through a Radian surety bond.
KEY RATING DRIVERS
SOUND COVERAGE FROM A LIMITED BASE: Housing and non-housing bond coverage is projected by Fitch at 1.53x maximum annual debt service (MADS) and 1.55x, respectively, for fiscal 2014. Fitch believes this level is consistent with the current rating level because of the project area's small size and concentration, despite only moderate tax base volatility.
WEAK ECONOMY IN RECOVERY: The town is geographically remote with weak employment and income indicators and an economy dominated by agriculture. However, the employment base is in its fifth year of expansion, and construction and permitting activity moderately increased recently.
ADEQUATE ADMINISTRATIVE PERFORMANCE: The agency appears to be in compliance with material indenture and statutory requirements, and the agency is continuing to segregate tax increment revenues from the city's pooled cash fund.
RATING SENSITIVITIES
TAX BASE PERFORMANCE: Unexpected and material deterioration or sustainable growth of the project area's tax base could result in a negative or positive rating action.
CREDIT PROFILE
The agency is located in the town of Atwater, about six miles north of Merced in California's Central Valley.
SOUND DEBT SERVICE COVERAGE, SOME NEW DEVELOPMENT
Fitch estimates fiscal 2014 net revenues of $1.3 million will cover non-housing and housing MADS a solid 1.55x and 1.53x, respectively. Actual coverage levels have exceeded Fitch estimates over the past few years due to one-time revenues related to supplemental property tax assessments. A similar dynamic could boost coverage above Fitch-estimated levels in fiscal 2014, particularly given new development activity noted below.
Fitch estimates assessed value (AV) would need to decline by 31.5% and 31%, respectively, for MADS coverage to reach 1.0x on the non-housing and housing TABs. This compares quite favorably to the project area's cumulative recessionary AV loss of 5.6%.
Fiscal 2014 AV increased a modest 0.9%, and management pointed to some factors that could stabilize or modestly grow AV over the near term. First, a sizeable backlog of appeals related to some of the project area's largest taxpayers were withdrawn or otherwise resolved. Second, approximately $500,000 of new construction occurred after the fiscal 2014 roll that is likely to be reflected in the upcoming fiscal 2015 roll (which is based on property values as of Jan. 1, 2014). Third, residential construction permit activity has picked up significantly from admittedly low recessionary levels.
Longer term, the project area has a mothballed 160 lot residential development that could add significantly to AV if and when development resumes. Also, management is actively working with developers in the project area who have expressed interest in opening a 90-room hotel, improving various commercial sites, opening a new restaurant, and expanding an existing one.
SMALL, CONCENTRATED PROJECT AREA IN ECONOMICALLY WEAK TOWN
The project area is somewhat small at 840 acres, and contains high concentration levels, with the top 10 taxpayers making up 31% of AV (35% of incremental value [IV]). The largest taxpayer, Teasdale Quality Foods (9% of AV, 11% of IV), recently merged with two other food processing companies and combined their headquarters in Atwater. Although the move is not expected to expand the company's local footprint, it nonetheless is a positive sign with regard to the company's longer-term intentions to stay within the project area.
The city was severely affected by the housing-led recession, with unemployment peaking at nearly 20%. The project area's AV fared better than expected, however, as continued industrial development offset rapidly falling residential valuations. As a result, the project area's peak to trough AV loss was just 5.6%, well out-performing a number of project areas in the Central Valley.
Although the project area's AV held up fairly well through the downturn, other economic indicators are weak. Unemployment is down significantly from its peak, but is still very high at 13.9% as of November 2013. Recent unemployment reductions have come from a combination of rising employment and a worrying reduction in the labor participation rate.
As is typical of an agricultural community, income levels are low. Median household income levels are at 66% and 77% of the state and national averages, respectively. Per capita incomes are even lower, suggestive of relatively large family sizes. Educational attainment and poverty rates both lag the state and nation.
SATISFACTORY IMPLEMENTATION OF DISSOLUTION PROCEDURES
Management appears to be implementing RDA dissolution procedures (per AB 1X26) in a satisfactory manner. The agency was issued a Finding of Completion from the California Department of Finance (DOF) and is using administrative procedures approved by DOF to balance its six month cash flows with the help of a private consultancy. The agency's former cash flow issues involving county disbursements reportedly have been resolved.
The agency is not tracking housing increment separately from non-housing increment, which does not materially impact the ratings as debt service coverage is roughly equal for both the housing and non-housing TABs.
The agency is continuing to maintain a separate cash account solely for the agency's TAB debt service. The agency formerly commingled its debt service funds in a pooled cash account with the fiscally stressed town of Atwater. Fitch was concerned by the possibility that the town might borrow from the agency for its own general governmental purposes, as it did with some enterprise funds. The agency's continued use of a special reserve and its ongoing commitment to separating the agency's debt service funds is required to maintain the TABs' current credit rating.
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=822986
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