NEW YORK--(BUSINESS WIRE)--Fitch Ratings has upgraded the following Santa Ana Community Redevelopment Agency (the agency) tax allocation bonds (TABs):
-- $66.8 million refunding TABs, series 2011A, to 'AA-' from 'A+'.
The Rating Outlook is Stable.
SECURITY
The bonds are backed by a senior lien on gross tax increment in the merged project area, net of housing set-asides and pass-throughs to various entities. Debt service on certain 2003 TABs (not rated by Fitch) is senior to debt service on the 2011A TABs in relation to tax increment from the South Main Street sub-project area only. The bonds are additionally payable from housing set-aside increment revenues.
KEY RATING DRIVERS
MATERIALLY IMPROVED DEBT SERVICE COVERAGE, AV CUSHION: The upgrade reflects Fitch's refined analysis of surplus housing revenues, which the agency now considers to be available to pay non-housing TAB debt service. The availability of these revenues, aided by assessed value (AV) gains, has materially improved the bonds' debt service coverage and resilience to shifts in AV. Coverage holds up sufficiently under various Fitch stress tests.
CLOSED LIEN AFTER DISSOLUTION: Fitch considers all TAB liens to be closed, as successor agencies (SAs) are not permitted to issue new money TABs.
SOMEWHAT CONCENTRATED TAX BASE: The top 10 taxpayers in the merged project area account for a moderately concentrated 19% of incremental value (IV), with the largest taxpayer accounting for 4% of IV.
MIXED LOCAL ECONOMY: The local economy benefits from its size, diversification, and location in Orange County. However, socioeconomic indicators are mixed, with below average income levels, above average poverty, but decreased unemployment currently below the state average and close to the national average. Merged area AV has stabilized and experienced consistent annual growth in recent years.
RATING SENSITIVITIES
CHANGES IN REVENUE AVAILABLE FOR DEBT SERVICE: The rating is sensitive to tax base changes outside the historical range. Tax base declines that materially decrease pledged revenues could have a negative effect on the rating. Given recent AV stability and growth trends, Fitch believes such shifts are not likely in the near term. Tax base growth that materially increases pledged revenues could have a positive effect on the rating.
CREDIT PROFILE
The city of Santa Ana (the city) is the 11th largest city in California, by population, and is located in Orange County. The merged project area is comprised of six formerly separate project areas scattered throughout the city that were merged by a city ordinance in 2004.
UPGRADE REFLECTS IMPROVED DEBT SERVICE COVERAGE
In May 2014 Fitch refined its California Redevelopment Agency analysis pertaining to the beneficial impact of dissolution legislation (AB 1X 26). Fitch now considers TAB liens to be closed and surplus housing set-aside revenues to be available for non-housing TAB debt service. 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 of all in maximum annual debt service (MADS) by fiscal 2016 revenues (including the housing set-aside and excluding estimated senior pass-through payments) is strong at 3.8x (or 2.6x excluding housing set-aside revenues). As there is no housing set-aside backed debt outstanding, debt service coverage benefits strongly from the available housing set-aside revenues. Coverage stands up well to various Fitch-designed stress scenarios, including the loss of the top 10 taxpayers, which would lower coverage to a still strong 3.1x. An AV decline of about 60% would be required to reduce total MADS coverage to 1.0x.
MIXED LOCAL ECONOMY; RECENT AV GROWTH
The large and diverse local economy benefits from its central location within Orange County and its position along major transportation routes. However, local socioeconomic characteristics are mixed. August 2015 city unemployment was 5.1% (down from 6.6% a year prior), which is lower than the state average (6.1%) but close to the national average (5.2%). The city's per capita money income is low at 55.5% and 58.2% of state and national levels, respectively. The city's median household income is lower than the state average but at the national average. Poverty levels are above average.
Real estate weakness caused a 6.7% AV decline for fiscal 2011, followed by stabilization and growth in subsequent years. The city saw annual AV growth of 2% to 4% in recent years. Continued growth is expected as there are a number residential and commercial development projects recently completed or underway. Employment losses associated with the relocation of Ingram Micro to Irvine, CA and the closure of Corinthian College campuses are expected to be covered by recent and planned business expansions.
The merged area, which is mainly commercial and industrial, has significant exposure to unsecured AV; however, a material portion of the unsecured AV consists of property-related leasehold interests, which somewhat mitigates concerns regarding volatility of unsecured property values.
The top 10 taxpayers within the merged project area are moderately concentrated, making up 15.5% and 19% of AV and IV, respectively. The largest taxpayer, Mainplace Shoppingtown, is a one million square foot mall that accounts for 3.3% of AV and 4% of IV.
COMPLIANCE WITH DISSOLUTION PROCEDURES
The city of Santa Ana has been recognized as the SA to the RDA. Recognized obligation payment schedules (ROPS) that include 2015 debt service have been approved by the oversight board and state. The SA has received approval for sufficient funds to cover 2015 debt service payments. Funding for the next debt service payment, due in March 2016, is expected to be approved under the Jan. 1, 2016 to June 30, 2016 ROPS, which is currently under review by the Dept. of Finance. The SA received its state Finding of Completion in November 2014 and reports good working relations with its oversight board and the state department of finance.
Dissolution-related (AB 1X 26) risks are lessening as management is continuing to adhere to indenture requirements, and necessary revenue tracking is in place. Since dissolution, the SA's procedures to manage dissolution have become well-established, lessening operational risks.
Additional information is available at 'www.fitchratings.com'.
Fitch recently published an exposure draft of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015). The draft includes a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to fewer than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published by Jan. 20, 2016. Once approved, the criteria will be applied immediately to any new issue and surveillance rating review. Fitch anticipates the criteria to be applied to all ratings that fall under the criteria within a 12-month period from the final approval date.
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, and Zillow.
Applicable Criteria
Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869942
Tax-Supported Rating Criteria (pub. 14 Aug 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=994260
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=994260
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https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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