SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has upgraded the following Oakley Redevelopment Agency, California's tax allocation bonds (TABs):
--$24.8 million subordinate TABs series 2008 to 'BB+' from 'BB'.
The Rating Outlook is revised to Stable from Negative.
In addition, Fitch affirms the 'A' rating on the following senior TABs of the RDA:
-- $6.4 million TABs, series 2003.
The Rating outlook on the series 2003 TABs remains Stable.
SECURITY
Per the indenture, the senior TABs are secured by tax increment revenues generated within the project area, net of administration fees, pass-through amounts, and housing set-aside funds. Part of the senior TABs was used for low/moderate income housing purposes and can be repaid from the housing set-aside revenues.
The subordinate bonds are secured by net tax increment after debt service payments on the agency's senior 2003 TABs.
Each series of TABs has its own cash-funded debt service reserve fund, with the standard three-pronged requirements. As of December 2013, both are fully funded at $674,860 for the 2003 series and $1,999,750 for the 2008 series.
KEY RATING DRIVERS
SURPLUS HOUSING REVENUES BOOST COVERAGE: 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 materially improved the bonds' debt service coverage.
AV STABILIZATION: The Outlook revision to Stable reflects growth in assessed values (AV) in fiscal 2014, following four years of AV contraction. AV performance is expected to be modestly positive over the near term as home prices in the area are increasing from previously depressed levels.
SOLID SENIOR LIEN COVERAGE: The 'A' rating on the senior lien TABs reflects solid maximum annual debt service (MADS) coverage and significant resilience to potential AV declines.
MIXED ECONOMIC INDICATORS: The project area tax base is moderately concentrated and historically volatile. However, it benefits from the city's underlying economy which features above-average income levels and favorable unemployment rates.
SATISFACTORY AB1X26 IMPLEMENTATION: The rating incorporates the expectation that the agency will continue its satisfactory implementation of AB1x26 (dissolution legislation) procedures and prioritize the rated debt service payments.
RATING SENSITIVITIES
TAX-BASE CONTRACTION: An unexpected reversal of the recent AV gains would likely result in negative rating action.
CREDIT PROFILE
The city of Oakley (the city) is about 50 miles northeast of San Francisco, and 58 miles southwest of Sacramento. The Oakley Redevelopment Project Area is 1,537 acres, or about 15% of the city. It is 59% residential and 19% commercial. Following the dissolution of the former Oakley Redevelopment Agency, the city has taken over as the successor agency (SA) to wind down operations and facilitate debt payments.
ANALYTICAL REFINEMENT CONSIDERS POSITIVE EFFECTS OF DISSOLUTION
On May 1 Fitch began to include in its TAB analyses the beneficial impacts of dissolution legislation (AB1X26). Fitch now considers TAB liens to be closed and surplus housing revenues (after housing TABs) to be available for non-housing TAB debt service. The availability of surplus housing revenues led to a material improvement of debt service coverage, resulting in the upgrade.
Prior to May 1, Fitch had explicitly not considered these positive dissolution factors in its TAB analyses, reflecting a conservative approach to a dissolution environment marked by legislative, administrative, and judicial uncertainty. Over the last two-and-a-half years since dissolution was upheld by the court, six recognized obligation payments schedule (ROPS) cycles have passed during which the surplus housing revenue and closed liens have benefited TAB credit quality with no successful legal challenges to date. Although uncertainties persist, 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.
IMPROVED SUB COVERAGE, STILL VULNERABLE
The subordinate 2008 TABs coverage increases materially after the inclusion of surplus housing revenues, as Fitch now views these to be available for non-housing debt. Annual debt service for 2014 for the 2008 series, including surplus housing revenues, is 1.17x, a significant uplift from the weak 0.97x excluding these revenues. MADS also improves from 0.93x to 1.12x when surplus housing revenues are included; under base case projections, the debt service reserve fund will no longer be drawn upon. Fitch cautions that MADS is still vulnerable to AV changes. A 7.5% decline in AV would result in a slightly below 1x coverage for MADS, and a repeat of the AV declines experienced in fiscals 2009 and 2010 would result in a depletion of the debt service reserve fund within three years.
SOLID SENIOR COVERAGE
Series 2003 senior TABs benefit from strong coverage levels with or without surplus housing revenues. Around 15% of the senior lien debt service is eligible to be paid from the 20% housing set-aside funds, as part of the original bond proceeds was used for low/moderate income housing purposes. MADS coverage by 2014 revenues on this housing portion of the senior lien TABs is high at over 5.3x due to the limited amount of senior debt. The non-housing portion of the senior TABs also enjoys a solid 4.4x MADS, up from 3.6x without surplus housing revenues. Both are resilient to various AV stresses, and can still achieve over 1x MADS if AV falls by 53% (versus 52% excluding surplus housing revenues), a level that Fitch considers very resilient.
IMPROVED AV, MODERATE CONCENTRATION
The recent stabilization of the historically volatile tax base is expected to continue over the near term. Project area AV exhibited large variations in recent years, with double-digit annual growth rates in pre-recession years and a large one-year decline of 21% in fiscal 2010 followed by more moderate declines in 2011, 2012 and 2013. By fiscal 2013, AV was 29% below peak. Fiscal 2014 AV increased for the first time since 2009 with a gain of 3.6%. Fitch expects additional growth over the next few years based on positive changes in the local real estate market, as shown by the 25% year-over-year increase in the Zillow housing index for the city. The project area real estate market performance is likely to be weaker than the city's, but is expected to be modestly positive.
The rating is affected by the tax base's concentration. While the top 10 property taxpayers account for a moderate 18% AV, or 25% of incremental values (IV), already low coverage levels on the subordinate bonds would likely fall below 1.0x with the loss of any of the top 10 taxpayers.
BEDROOM COMMUNITY WITH MIXED ECONOMIC CHARACTERISTICS
The city, in north-eastern Contra Costa County, is a bedroom community to the San Francisco and Sacramento employment centers and is home to approximately 36,000 residents. The city experienced strong population growth in the early 2000's with a corresponding housing boom, and was subsequently hit disproportionately hard by the housing-led recession.
Other economic indicators are above average. The city's unemployment has consistently been low. At 4.6% in December 2013, it compared favorably to that of the state (7.9%) and the nation (6.5%). The median household income is equivalent to 127% of California average, and 148% of national average.
AB 1X26 IMPLEMENTATION
The SA has completed six ROPS processes, and continues to put cash reserves on its July to December ROPS for the next September principal repayments. Both the SA and the Dept. of Finance (DOF) have demonstrated commitment to prioritize debt service payments which are only subordinate to limited county administration fees and senior pass-through (less than 4% in total). The city is in litigation with the DOF regarding a $1.3 million obligation related to the former RDA, which among other things hinders the receipt of a finding of completion letter. However, no impact on debt service payments is expected.
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, and Zillow.
Applicable Criteria and Related Research:
--'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
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