Fitch Ratings downgrades Syracuse Industrial Development Agency, New York's (SIDA) $228.085 million PILOT revenue bonds series 2007 A and $97.648 million PILOT revenue bonds, taxable series 2007 B (collectively, the bonds) to 'A' from 'AA-'. Fitch also removes the bonds from Rating Watch Negative and assigns a Stable Rating Outlook. The bond proceeds were used to fund an expansion project (project) at the Carousel Center Mall located in Syracuse, New York (the mall).
The downgrade reflects the Carousel Center Mall's satisfactory operating performance, dependence on investment earnings to provide debt service coverage on the bonds and continued downward pressures on the retail sector. Additional credit concerns include the concentrated revenue stream from the single site and a significant decline in Fitch's estimate of the value of the real estate. Fitch believes continuing challenges in the retail sector driven by declining retail sales and potential tenant bankruptcies could stress the mall's financial operations. Furthermore, ongoing litigation with the construction lender for the project may further pressure operations. Fitch's removal of the Watch Negative is based on the replacement of a previously terminated guaranteed investment contract (GIC). While the replacement GIC with the Royal Bank of Canada is at a lower interest rate, it is expected to provide sufficient pledged revenues together with the PILOT payments to cover debt service payments.
The bonds are secured by a payment-in-lieu-of-taxes (PILOT) to SIDA by the Carousel Owner, a limited partnership which includes Carousel Enterprises Company, LLC and Carousel General Company, LLC, pursuant to a PILOT Agreement, as well as the interest earnings on the debt service reserve guaranteed investment contract. The PILOT mortgages granted by the Carousel Owner and SIDA impose a lien similar to liens imposed by taxing authorities, and provide for similar remedies, i.e., foreclosure of property and tax lien sale. The Carousel Owner's obligation to pay the PILOT is on par only with governmental charges and fees, all of which are senior to any of its other payment obligations. The other obligations include: a $310 million commercial mortgage, a $100 million mezzanine loan, the cost of operations and maintenance, and any distributions to the Carousel Owner. Any additional issuance of parity bonds requires an increase in the PILOT equal to the additional debt service. It is envisioned that bonds issued to fund future expansions will be separately secured by PILOTs on other portions of the Carousel Center, which will constitute separate tax parcels, and will not be owned by the Carousel Owner.
The Expansion Owner, DestiNY USA Holdings LLC, is currently in litigation with its construction lender, Citigroup Inc., to enforce the terms on loan agreements and require Citigroup to resume funding of the project. The New York Supreme Court ordered Citigroup to continue to make payments in July of 2009, but Citigroup appealed and a higher court ruling is pending. While the project is reportedly 90% complete, there is no certainty as to when the project will be completed and open.
The Carousel Center is a super-regional shopping center opened in 1990; located in Syracuse, NY and sited on approximately 83.5 acres, 44.4 of which are subject to the PILOT agreement. The PILOTs securing the 2007 bonds are not dependent upon the successful completion of the expansion project. Gross leasable area (GLA) totals 1.5 million square feet, and features approximately 134 mall shops, four anchor tenants, four eat-in restaurants, a food court and a 17-screen Regal theatre. Upon completion of the expansion, the size of the mall will increase by approximately 850,000 square feet of GLA, to be contiguous with the existing Carousel Center. The expansion is the first phase of a larger development plan to transform the mall into a unique resort known as DestiNY USA.
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