NEW YORK--(BUSINESS WIRE)--Fitch Ratings has taken the following action on Duarte Redevelopment Agency, CA's (RDA) tax allocation bonds (TABs):
--$19.1 million TABs, series 2007 A, B & C, upgraded to 'A' from 'A-'.
The Rating Outlook is Stable.
SECURITY
Per the bond indenture, the bonds are secured by a pledge of tax increment revenue collected within the project area net of county administrative fees, tax-sharing payments to overlapping entities, and the 20% set-aside for low and moderate income housing.
KEY RATING DRIVERS
MATERIALLY IMPROVED DEBT SERVICE COVERAGE, AV CUSHION: The upgrade reflects Fitch's refined analysis of surplus housing revenues, which Fitch now considers to be available to pay non-housing TAB debt service. The availability of these revenues, aided by recent assessed value (AV) gains, has materially improved the bonds' debt service coverage and resilience to shifts in AV.
STABLE LOCAL ECONOMY; MODERATE CONCENTRATION: Local area employment trends have been positive, though unemployment remains above national levels. Wealth and household income levels are above average. AV growth has been generally flat in recent years, but grew by 2.1% in fiscal 2014. Top tax payers are moderately concentrated.
RATING SENSITIVITIES
SHIFTS IN REVENUE AVAILABLE FOR DEBT SERVICE: The rating is sensitive to shifts in pledged revenue due to tax base changes. Tax base declines that decrease pledged revenues could have a negative effect on the rating. Given AV stability and recent improvement, Fitch believes such shifts are not likely in the near term.
SATISFACTORY AB 1X26 IMPLEMENTATION: The rating assumes continued satisfactory implementation of AB 1x26 (dissolution legislation) procedures and prioritization of debt service payments.
CREDIT PROFILE
The city of Duarte is located in Los Angeles County, about 22 miles northeast of downtown Los Angeles and about 10 miles east of Pasadena. The 2013 population was 21,724, up about 1% from 2000. The merged project area, comprised of eight redevelopment projects, is small at 684 acres or about 16% of the city's total acreage, though it makes up over 40% of the city's total AV.
ANALYTICAL REFINEMENT CONSIDERS POSITIVE EFFECTS OF DISSOLUTION
On May 1, Fitch refined its California RDA analysis pertaining to the beneficial impact of dissolution legislation (AB 1X26). Fitch now considers TAB liens to be closed and surplus housing revenues to be available for non-housing TAB debt service.
Fitch formerly excluded positive dissolution factors from consideration, reflecting a conservative approach to a dissolution environment marked by legislative, administrative, and judicial uncertainty. Two-and-a-half years and six recognized obligation payments schedule (ROPS) cycles have passed since dissolution, during which the factors have benefitted TAB credit quality with no successful legal challenges to date. Although uncertainties remain, Fitch views the continued presence of closed TAB liens and surplus housing revenue availability as more likely than not to remain a feature of California TABs.
COVERAGE ENHANCED BY HOUSING REVENUES AND AV GAINS
Coverage of maximum annual debt service (MADS) based on fiscal 2014 revenues (net of senior pass-throughs but including the former housing set-aside revenues), is about 2.0x. If the 20% housing set-aside were maintained, MADS coverage from revenues net of the set-aside would be about 1.5x. Coverage stands up well to various Fitch-designed stress scenarios, including the loss of the top 10 taxpayers. An AV decline of about 47% would be required to reduce debt service coverage to 1.0x MADS. The RDA does not have any housing TABs. About $3 million is currently held in a cash-funded debt service reserve fund.
STABLE LOCAL ECONOMY
City residents benefit from easy access to the greater Los Angeles area. Area employment trends have been positive, with 2% growth year-over-year for April 2014. Area unemployment, 7% in April 2014, decreased from 8.6% a year prior and was below the state average (7.3%) but higher than the national average (5.9%). The project area is home to the City of Hope National Medical Center, the largest employer, and surrounding medical and medical offices. City per capita income is closer to national levels (92%) but lower relative to the state average (87%). Household income indicators and individual wealth levels exceed state and national averages.
Construction has begun on the Duarte rail station and is expected to be completed by mid-2016. The station is part of the Gold Line Foothill Construction Authority project which will connect Los Angeles through Duarte to Ontario. Recent building activity has included a City of Hope construction project and a senior housing development. This has increased building permitting, but will not impact AV, as the projects are for non-profit entities.
Following a period of strong annual growth between 2003 and 2009, the project area tax base has been essentially flat in recent years. AV did pick up in 2014 (2.1%), reflecting improving economic conditions and increases related to housing turnover. Management expects flat to moderate growth in the near term.
MODERATELY CONCENTRATED PROJECT AREA
The project area is small at 684 acres, but substantially developed, with a very high 1276% incremental to base value for 2014. Land use is largely residential (about 56%) followed by commercial (25%) and industrial (10%) properties. The top 10 taxpayers are moderately concentrated at 21.2% of fiscal 2014 incremental value (IV). Leading taxpayers include several shopping centers, auto dealerships, apartment building complexes, medical offices, and an aerospace manufacturing firm.
IMPLEMENTATION of AB 1X26
The city of Duarte has been recognized as the successor agency (SA) to the RDA. ROPS which include 2014 debt service have been approved by the oversight board and state. The SA has received approval for sufficient payments to cover 2014 debt service payments.
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, 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=835260
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