Fitch Ratings upgrades its ratings on the following credits located in Orleans Parish, Louisiana:
--New Orleans Sewerage and Water Board $24.9 million drainage system bonds upgraded to 'BBB-' from 'BB';
--New Orleans Audubon Park Commission $36.3 million general obligation aquarium bonds upgraded to 'BB+' from 'BB'.
(Note: All outstanding aquarium debt is insured.)
Also, Fitch has affirmed the following New Orleans Sewerage and Water Board ratings:
--$189.5 million sewerage service revenue bonds at 'B';
--$42.5 million water revenue bonds at 'B'.
(All outstanding debt of the board is insured)
As noted, these issues carry bond insurance, with the insurers expected to cover debt service non-payments, should they occur. Fitch's ratings and Outlooks apply to the underlying ratings only.
The Rating Outlook is Stable for all of the above credits.
The upgrades reflect the city's ongoing, albeit uneven, economic recovery from Hurricane Katrina, and apparent stabilization of the local tax base and the level of property tax collections. The number of grant closings associated with the state's Road Home Program finally is climbing after months of minimal closing activity. The increase of activity in this program, which provides grants to affected area homeowners for rebuilding or relocation, offers hope that the pace of reconstruction in New Orleans may finally begin to accelerate. Also, various federal and state financial assistance and economic development initiatives, along with a number of large planned construction projects, should provide sizeable economic stimuli over the next several years. However, significant uncertainty remains regarding the pace of repopulation and long-term recovery in the area. Housing, labor, schools, healthcare and public safety remain areas of critical need in the city.
In affirming the Sewerage and Water Board revenue bond ratings at below investment grade, Fitch believes that these securities retain more credit risk, largely resulting from weakened cash flow, reliance on non-recurring sources for financial relief, and substantial capital needs. Nonetheless, Fitch acknowledges the board's progress in returning to a regular billing cycle and improved collection rates.
A major factor behind Fitch's Stable Rating Outlook is impact of the 2006 sale by the State of Louisiana of $200 million in federal tax credit bonds and $200 million in the form of a state match, the proceeds of which were made available to a number of New Orleans local governments to assist with debt service payments over the next 12-24 months. The Sewerage and Water Board and the Audubon Commission each were recipients of loan proceeds ($77.5 million and $16.8 million, respectively), which has freed up scarce financial resources for operational needs.
In addition, Fitch believes the parish tax base and property tax collections have stabilized, at least for the near term. Taxable values increased roughly 10.5% for 2007, reducing the cumulative tax base decline since 2005 to approximately 15%. Property tax collections in 2006 were higher than original projections at about 80%, and 2007 collections are expected to reach comparable levels. This stabilization is a primary factor in Fitch's decision to upgrade the drainage system bonds of the Sewerage and Water Board and the general obligation aquarium bonds of the Audubon Commission; both are secured by property tax revenues.
Recovery in New Orleans continues to lag well behind that in other storm-affected areas, due to a combination of factors. The current estimated population of 225,000 is less than 50% of the pre-storm population of 465,000. The central business district, French Quarter, and Uptown neighborhoods are active, primarily due to limited flood damage. The level of tourist traffic has steadily increased, although total visitor counts remain well below pre-storm levels. The number of available hotel rooms and daily airline flights also have yet to fully recover. While lot clearing and some rebuilding is underway in many neighborhoods, large sections of the city remain largely uninhabited; owners of flood-damaged properties have been waiting for resolution of questions surrounding redevelopment plans and financial assistance for rebuilding. The city's long-awaited master redevelopment plan finally was unveiled last month, when officials identified 17 areas targeted for reconstruction and renewal that the city hopes to support through various financial incentive packages.
The Sewerage and Water Board, which provides retail water, sewer and drainage services to residents in New Orleans, resumed regular monthly billing in April 2006. The current customer base of roughly 125,000 is down approximately 15,000 from the pre-storm total. Utility bill collections have improved in recent months as the board has settled into a normal billing cycle; total 2006 receipts were roughly 90% of billed amounts.
Due to the much smaller customer base, cash flow remains a significant concern. The board has relied on $58 million in federal community disaster loan (CDL) proceeds to help pay operating costs. The CDL money, plus the federal tax credit bond proceeds, has improved the board's liquidity position. However, the CDL money is exhausted and the federal tax credit bond proceeds will last only until mid-2008. Board budget projections suggest that revenues from water and wastewater service charges alone will be insufficient to meet total operating and debt service costs in 2008 and 2009. Even with planned water rate increases for each of the next five years, projections indicate that little money will be available for water and wastewater capital projects (federal funding is scheduled the pay the majority of drainage system capital costs over the next three years). A recent capital needs assessment performed by the board's consulting engineer identified $5.7 billion in total short-term and long-term project costs, including $1.9 billion through 2009. Fitch historically has cited poor liquidity as a credit weakness of the board. The limited cash flow, along with reported slow reimbursements from the Federal Emergency Management Agency (FEMA) for storm-related damages, has hindered board efforts to repair facilities and maintain service at expected levels.
The Audubon Commission operates the Aquarium of the Americas, which reopened in May 2006 after completion of storm-related repairs (the commission also operates the Audubon Zoo). Aquarium debt is repaid through a limited property tax levied against all taxable property in New Orleans. As with the drainage tax bonds of the Sewerage and Water Board, Fitch cites the stabilized property tax collections and tax base as primary factors behind the rating upgrade. Commission staff is utilizing the federal tax credit bond money to make its debt service payments through mid-2009, and is applying property tax revenues to operations during this period. This practice, which affords some much-needed financial flexibility, anticipates that visitor counts and admission revenues will improve by 2009 so the tax revenue subsidy will no longer be necessary. The 2007 budget expects visitor totals to the aquarium and zoo to be 60% and 65%, respectively, of 2004 counts. Commission staff report no cash flow problems, as revenues and expenses so far in 2007 are in line with budget estimates. Insurance proceeds and donations have helped with both repair activities and operations, according to staff.
Fitch will continue to monitor these entities and other New Orleans area credits. As developments occur and as the reconstruction process proceeds, Fitch will review the credit fundamentals of each and take any appropriate rating action.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
