SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has affirmed the following tax allocation bonds (TABs) for Riverside Public Financing Authority, CA (the PFA) and has revised the Rating Outlook to Positive from Stable:
--$8.2 million (Casa Blanca & Downtown/Airport Redevelopment Projects) TABs, series 2007A, at 'BBB';
--$13.0 million (Casa Blanca & Downtown/Airport Redevelopment Projects) taxable TABs, series 2007B, at 'BBB'.
SECURITY
The bonds are secured by loan repayments to the PFA from non-housing tax increment revenue net of applicable pass-through payments and county administrative expenses, and are additionally payable from housing increment on a subordinate basis to housing TABs, in each of the project areas. While revenue pledged to debt service combines repayments from all project areas, none of the project areas is responsible for the shortfall in another's payments per the TAB indenture. The bonds are additionally backed by an MBIA debt service reserve surety bond.
KEY RATING DRIVERS
IMPROVED AV CUSHION: The Positive Outlook reflects improvement of the Casa Blanca project area's assessed valuation (AV) cushion (the amount of AV decline that can be absorbed before coverage becomes sum sufficient) and the expectation that maintenance or further improvement of the cushion will lead to an upgrade. As a several but not joint obligation, the rating is based on Fitch's assessment of the weaker of the two project areas, which in Fitch's view is the Casa Blanca project area.
SURPLUS HOUSING REVENUES BOOST COVERAGE: Casa Blanca's improved AV cushion in part 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 project area's debt service coverage and AV cushion.
HIGH TAX-BASE CONCENTRATION. Both tax bases are very concentrated among the top 10 payers; however, this risk is mitigated somewhat by a high incremental value (IV)/base-year value, reflective of the maturity of the project areas.
ECONOMIC RECOVERY UNDERWAY. The city's economy was affected severely by the housing downturn, but recent data points to strong employment growth and rebounding home prices.
COMPLIANCE WITH DISSOLUTION PROCEDURES: Dissolution-related (AB 1X 26) risks are being mitigated as management is continuing to adhere to indenture requirements, necessary revenue tracking is in place, timely and robust continuing disclosure reports are being provided, and debt service reserves are being used to mitigate dissolution-related cash flow issues.
RATING SENSITIVITIES
SUSTAINED TAX BASE GAINS: Retention of recent AV gains, or further AV improvement, in the Casa Blanca project area likely would lead to an upgrade.
CREDIT PROFILE
The city of Riverside is located in western Riverside County in California's Inland Empire. The project areas together comprise a very large 16,295 acres and 44% of the city's fiscal 2013 AV.
EMPLOYMENT RECOVERY CONTINUES; HOME PRICES UP SUBSTANTIALLY
The city is in its fifth year of employment recovery, with 2013 employment at last surpassing its prior peak in 2007. Regional employment sectors experiencing the most rapid growth include education and health care (6.6% annualized growth from 2009-2013), transportation and utilities (6.3%), and construction (5.3%). Despite the employment market's progress, April 2014 unemployment remained elevated at 8.4% versus state and national averages of 7.3% and 5.9%, respectively. City per capita income levels remain below average, at 77% and 82% of state and nation rates.
The city's housing market has realized substantial gains over the past year with April 2014 values up an impressive 23% year-over-year according to Zillow. January 2014 values were up 25% year-over-year and are the basis upon which fiscal 2015 AV levels will be determined. AVs in the project areas are unlikely to rise by the same degree as home market values for three reasons. First, the project areas contain significant commercial real estate concentration, and changes to commercial values have lagged residential values over the past several years. Second, Proposition 13 limits AV increases to no more than 2% annually (unless property turns over), except for properties subject to a Proposition 8 AV reduction. It is unknown what proportion of properties in the project areas are subject to Proposition 8. Finally, it is unclear to what extent city-wide residential value gains apply to the housing stocks located within the project areas.
Despite these limitations, Fitch believes the project areas ultimately will benefit from some positive valuation tailwinds from the broader regional real estate recovery. Fitch's base case 5% AV growth assumption for fiscal 2015 matches the city's assumption and is based on a discount to the 6.5% growth estimate provided by the county. To the extent that the project areas realize growth in excess of these estimates, there could be positive credit implications assuming these gains appear likely to hold or expand.
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 1X 26). Fitch now considers TAB liens to be closed and surplus housing revenues to be available for non-housing TAB debt service. The availability of surplus housing revenues for non-housing TAB debt service led to a material AV cushion improvement for the Casa Blanca project area, resulting in the revision to a Positive Outlook.
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.
CASA BLANCA PROJECT AREA EXPERIENCING TAX-BASE GROWTH
The Casa Blanca project area is highly concentrated and small at 725 acres, but is centrally located and mature. Established in 1977, the project area benefits from a high IV/base-year ratio of 1681%. This is reflective of a low degree of additional revenue volatility for a moderate reduction of AV. The project area additionally benefits from a diverse mixture of taxpayers by land use. As of fiscal 2007 (the most recent land use information available), the project area's AV was 43% residential, 21% commercial, 13% industrial, and 11% unsecured. The top 10 taxpayers make up 33% of AV and a high 35% of IV.
Severe home price declines resulted in a significant three-year cumulative AV decline of 12% from fiscal years 2009-2012. However, AV began stabilizing in fiscal 2013 with a modest 1.3% gain that accelerated to a solid 4.3% gain in fiscal 2014. The fiscal consultant is projecting that pending appeals will result in a $6.1 million AV loss, or a manageable 1.8% of AV. This represents a slightly lower level of appeals than the prior year's 2.2%.
Based on fiscal 2014 AV, Fitch estimates the project area's net revenues at $2.44 million, covering parity debt service of $1.8 million by 1.52x. If appeals are applied at levels the fiscal consultant is currently projecting on top of a Fitch-projected 5% AV gain, Fitch-estimated debt service coverage will rise modestly to 1.59x in fiscal 2015. Fitch estimates the project area's AV cushion at an adequate 27.1% based on 2014 AV levels.
DOWNTOWN/AIRPORT PROJECT AREA EXPOSED TO HIGH APPEALS
The Downtown/Airport merged project area is highly concentrated, but mature and quite large at 2,415 acres. The project area's sub-areas were established in 1971 and 1976, with a correspondingly high IV/base-year ratio of 730%. Land use is concentrated in non-residential taxpayers, with residential AV making up just 16% of the total. The top 10 payers make up 34% of AV and a high 39% of IV. The project area experienced a fairly modest 4.2% AV decline from its fiscal 2010 peak to fiscal 2012 and AV increased by a modest 0.5% and 1.7% in fiscal years 2013 and 2014, respectively.
The project area is facing a large and growing backlog of pending AV appeals. The fiscal consultant is projecting a related AV loss of $118 million (8.8% of AV) in fiscal 2014, up from $93.6 million (7%) in fiscal 2011. Although Fitch views the level of appeals as significant, it is believed they could be absorbed without negative rating action due to the project area's sound AV cushion. However, this view is predicated on no unanticipated and material AV losses in addition to appeals losses.
Based on fiscal 2014 AV, Fitch estimates the project area's net revenues at $6.8 million, covering parity debt service of $3.2 million at 2.09x. If appeals and Proposition 8 AV reductions are applied at levels the fiscal consultant is currently projecting on top of a Fitch-estimated 5% AV gain, then fiscal 2015 debt service coverage would fall moderately to 1.99x. Fitch estimates the project area's AV cushion at an adequate 37.3% based on 2014 AV levels.
SATISFACTORY IMPLEMENTATION OF DISSOLUTION PROCEDURES
Management appears to be acting in conformity with its bond indentures, despite the administrative hurdles imposed by dissolution law (AB 1X 26). Management is continuing to track revenues on a project area-specific basis and is adhering to the senior/subordinate status of its various obligations. Dissolution law imposed a cash flow timing issue on the agency, which is being fully mitigated with the use of a debt service reserve fund, allowed under AB1484. Continuing disclosure remains timely and robust and the agency has received its finding of completion from the state's department of finance.
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, and Zillow.com.
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=836558
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