NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the following Fenton, MO bonds at 'BBB+':
--$8.165 million tax increment refunding revenue bonds, series 2006 (Gravois Bluffs Redevelopment District).
The Rating Outlook is Stable.
SECURITY
The bonds are limited obligations payable solely from Payments in Lieu of Taxes (PILOTS) and Economic Activity Tax (EAT or sales tax) revenues. PILOTS are property-related payments on the incremental value of real estate located within the district. The pledged EAT revenues consists of 50% of: 1) St. Louis County 1% sales tax 2) St. Louis County 0.5% transportation tax 3) city of Fenton 0.5% parks & storm water sales tax 4)city of Fenton 0.5% utility costs tax and 5) Grand Bluffs Transportation Development District 1% sales tax.
The pledge of the EAT tax is subject to annual appropriation by the city. PILOT payments are not subject to annual appropriation. The bonds are also secured by a cash-funded debt service reserve to the IRS standard.
KEY RATING DRIVERS
CONCENTRATION RISK: The bonds are secured by sales and utility taxes on a highly concentrated base, with the top 10 sales tax payers accounting for roughly three-quarters of total sales tax revenues, and an incremental value payment in lieu of taxes (PILOT) paid almost exclusively by the developer. PILOT payments accounted for 49.5% of pledged revenues in FY2012.
RISK OF NON-APPROPRIATION IS MINIMAL: Both the sales and utility tax revenues are subject to annual appropriation; however, there is little incentive not to appropriate as the revenues remain stranded if not appropriated.
PASSIVE TAX RATE: Incremental PILOT payments are derived from a passive tax rate established solely at the discretion of overlapping municipal entities.
RATING SENSITIVITIES
REVENUE PERFORMANCE AND COVERAGE: The rating is sensitive to the continued strong performance of the concentrated retail area comprising the district, as this performance directly correlates with the trend in pledged revenues and debt service coverage.
CREDIT PROFILE
The district encompasses a 0.43 square mile area advantageously located proximate to the intersection of highway 141 and highway 30 roughly 20 miles southwest of downtown St. Louis. The district serves as one retail corridor of the city of Fenton, which is an affluent community with per capita income levels at 136% of the state average.
CONCENTRATION RISK
The retail center draws customers from the affluent greater St. Louis County area. Currently there are 126 occupied retail establishments located within the district, consisting of several anchor stores including Lowe's, Wal-Mart, Kohl's, Sears and Target and supplemented by numerous small generic businesses. The St. Louis metropolitan region is saturated with identical and similar store competitors, thus there is no inherent competitive advantage.
There is point-of-sale concentration with the top 10 sales tax payers accounting for 73% of total fiscal 2011 sales tax revenues (69% of first half 2013 sales tax revenues), heavily weighted towards the top five payers. In 2012, sales tax revenues accounted for 49.9% of total pledged revenues, PILOTs 49.5%, and investment income the remainder.
The $4.3 million base property value for purposes of calculating PILOT payments was set in 1998 and the 2012 incremental value totals $55.1 million, thus there is low base ratio of 7.3%. Based on acreage, the district is more than 95% built-out; therefore, future incremental value growth would almost exclusively occur due to appreciation of the existing commercial properties.
If developer PILOT payments were disrupted, other pledged revenue would be inadequate to fully cover debt service; however, the cash funded DSRF would be sufficient to cover the shortfall, according to Fitch stress testing.
PASSIVE TAX RATE
The property tax rate within the district is passive, as the rate is set by the aggregate rates of all overlapping municipalities and may be adjusted at their sole discretion. PILOTS that are due and owing constitute a lien against the real estate. One private developer pays the vast majority of the PILOT payment, which amounts are indirectly generated from tenant lease payments.
ACCELERATED DEBT RETIREMENT
The bonds are structured as serial maturities through 2014 with a 2021 term maturity and mandatory redemptions beginning in 2015. Additionally, there is a special mandatory redemption feature whereby all excess revenues must redeem the 2021 maturity. Currently, only $7.39 million of the original $25.4 million 2021 maturity remains outstanding, after redemptions from excess revenues.
Assuming no growth from 2011 pledged revenues the bonds should be fully retired by 2014. However, given the extremely small geographic area, point-of-sale concentration, incongruent lease terms of tenants to the final maturity of the bonds, the presence of abundant local competitors, and PILOT payer concentration, there is risk of future pledged revenues declining materially and permanently. 2012 pledged revenues covered 2011 debt service 1.8x.
MINIMAL DILUTION RISK
The indenture currently does not authorize the issuance of any other bonds; however, nothing precludes the district from authorizing further debt. Fitch considers the risk of dilution to be minimal, given the expected short remaining life of the bonds and the lack of pending infrastructure needs.
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, Developer.
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=800815
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