Fitch Ratings assigns an 'A+' rating to the City and County of Denver, Colorado's (the city) excise tax revenue refunding bonds as follows:
--$73.3 million series 2009A;
--$36.9 million series 2009B.
The 2009A bonds and 2009B bonds are scheduled to sell via negotiation the week of March 23, 2009 and April 20, 2009, respectively. The Rating Outlook is Stable.
Fitch affirms the following ratings on the city's outstanding debt:
--$551.7 million general obligation (GO) bonds at 'AA+';
--$417 million certificates of participation at 'AA';
--$199.9 million excise tax revenue refunding bonds, series 2001A and 2005A at 'A+'.
In addition, Fitch affirms its 'AA+' rating on the City and County of Denver Board of Water Commissioners' $42.7 million GO bonds.
The 'A+' rating on the excise tax bonds reflects solid historical debt service coverage from pledged revenues despite recent weaker tax performance, satisfactory legal provisions, and the city's strong credit characteristics, reflected in the city's 'AA+' GO bond rating.
The bonds are secured by three excise taxes levied citywide: the lodger's tax, auto rental tax, and prepared food and beverage tax. Along with the general sales and use taxes, these excise taxes experienced slower rates of growth in 2008 with auto rental taxes actually posting a modest decline. The absence of additional debt plans and a level debt service schedule facilitate continued solid debt service coverage.
In affirming the city's GO rating, Fitch notes that the city's general fund is facing a large $56 million budget gap in the current year due to a revised flat overall revenue growth projection. Proposed budget cuts will close 79% of the gap; the remaining imbalance, totaling $12 million, will reduce the unreserved fund balance to 14% of spending, below its 15% fund balance target level but above its 10% floor. By city policy, reserves in this range can be used to stabilize the city's finances when anticipated revenue growth is below the historical average but only when accompanied by equal or greater expense reductions. Fitch will monitor the city's overall revenue trends, sales and use tax revenues in particular, and management's response to any additional deterioration in revenues.
The 2009A offering will refund about $74 million in outstanding excise tax revenue bonds, series 2001B, which were issued in variable-rate mode; the 2009B bonds will refund $36.9 million in outstanding excise tax revenue bonds, series 1999A. The refunded 2001B bonds were issued pursuant to a 1999 voter authorization of $261 million in bonds for the expansion of the Colorado Convention Center. Concurrently, voters approved an increase in the lodger's tax and auto rental tax to be used solely for debt service on the 2001A and 2001B series. All three excise taxes had been increased for the prior convention center project with the incremental revenue pledged to debt service on prior bonds that financed the construction.
Of the five tax rate increases pledged to repay the bonds (initial increases to the three excises taxes and the 2001 increases to two of the taxes), the three initial increases are pledged to the 2009A and 2009B bonds on par with the outstanding (after the refunding) series 2001A and 2005A. The latter increases to the lodger's and auto rental taxes also are pledged to the series 2001A, 2005B, and 2009A bonds, but are not available to pay debt service on the series 2009B bonds. Fitch rates the 2009B bonds the same as the other debt because coverage by the revenue pledged remains consistent with an 'A+' credit rating and because all bond series have an equal lien on the respective pledged excise taxes.
Combined, the pledged excise taxes generated $49.5 million in revenue in 2008 (unaudited) and have provided over 2.0 times (x) coverage of annual debt service for all outstanding bonds since 2002. Maximum annual debt service ($27.5 million in 2024) coverage would be 1.5x by 2008 pledged revenue. Excise tax revenues remaining after debt service are transferred to the general fund.
Legal requirements are somewhat weak given the narrow nature of these taxes, with this concern somewhat mitigated by the need to seek voter approval for additional debt. The additional bonds test allows issuance with 1.25x coverage by historical revenues.
While debt service coverage has remained solid, the pledged revenues have shown recessionary vulnerability, declining by 4% annually in 2001-2003. Subsequently, pledged revenues rebounded by strong annual average of over 11% per year through 2007. However, revenue growth slowed to 2.4% for 2008, with the fourth quarter showing particularly weak results for the auto rental tax. The lodger's tax performed best in 2008, rising 6.6%, while the food and beverage tax rose a small 2.5% and the auto rental tax posted a 2.8% decline. The city is projecting flat growth for the combined revenue pledge for 2009.
In assigning the 'A+' rating, Fitch notes the narrow nature of these pledged excise taxes, making them more vulnerable to economic swings. The lodger's tax makes up 48% of pledged revenue, followed by the rental car tax at 30% and the food and beverage tax at 22%. The auto rental tax is the most concentrated pledged revenue, with the five largest taxpayers accounting for 79% of total auto rental taxes. The lodger's tax is somewhat less concentrated, with the top five taxpayers composing 30% of total revenue. The prepared food and beverage tax is the most diverse, with less than 7% of total revenues derived from the top five generators.
The pledged revenues have benefited from the area's substantial new development, including hotel construction. The 2004 completion of the convention center expansion, which doubled its capacity, led to a 33% increase in hotel rooms citywide. Convention center officials indicate continued success in booking large conventions for the next several years. Nonetheless, Fitch expects that the pledged excise taxes will show weakness in the near-term as both business and recreational travel is impacted by the severe economic downturn.
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