Fitch Ratings assigns an 'AA' rating to the following District of Columbia income tax secured revenue bonds:
--Approximately $126.69 million income tax secured revenue refunding bonds, series 2010C (Adjusted SIFMA Rate).
The bonds, which are expected to sell via negotiation the week of March 15, 2010, will bear interest at a floating rate based on a fixed spread, established at pricing, to the SIFMA index rate. The series 2010C bonds are expected to mature serially on Dec. 1, 2010-12, to be finalized based on market conditions at pricing, but the District intends to undertake refinancings to maintain the amortization of the District's general obligation (GO) series 2008B variable-rate demand bonds that are being refunded with this offering. The series 2008B bonds have a final maturity in 2034.
The Rating Outlook is Stable.
RATING RATIONALE:
--The District's Home Rule Act expressly stipulates that revenue debt can be issued with a valid, binding and perfected security interest in the revenues pledged; sale of revenues and appropriation are not required.
--The bonds are secured by a statutory first lien on and pledge of the available tax revenues, received or to be received, superior to that of any other person, including GO bondholders; ample coverage afforded by largest portion of the pledged revenue stream alone.
--A significant portion of the pledged revenue stream is delivered directly to a lockbox, although residuals can flow out to the District.
--The District has the ability to modify rates and levels of income subject to the pledged taxes; however, this risk is mitigated by impairment covenants.
--Like states, the District cannot file for bankruptcy.
--Despite authority granted under the Home Rule Act, Congress has ultimate authority over the District's affairs.
KEY RATING DRIVERS:
--Performance of the pledged revenue streams;
--The District's adherence to legal covenants.
SECURITY:
The income tax revenue bonds are special obligations of the District with a statutory first lien and pledge on personal income and business franchise tax revenues and without recourse against other assets of the District.
CREDIT SUMMARY:
The 'AA' rating reflects the structure's strong legal provisions and the nature of the pledged revenues, which provide ample debt service coverage. The bonds are secured by a statutory first lien and pledge on personal income and business franchise tax revenues, received or to be received, superior to that of any other person, including district GO bondholders. (Fitch rates the District's GOs 'A+' with a Stable Outlook.) Pledged revenues are not reduced by amounts refunded to taxpayers and do not include Federal interest subsidy payments related to Build America Bonds (BABs). The district's Home Rule Act expressly stipulates that revenue debt can be issued with a valid, binding and perfected security interest in the revenues pledged, absent a sale of the pledged revenues and without requiring annual appropriations. Like states, the district is ineligible to file for protection under the U.S. Bankruptcy Code.
Personal income tax revenues have grown by 4% on an average annual basis between 1987 and 2009 despite rate reductions. Income tax withholding collections, representing 94% of estimated income tax collections in fiscal 2010, have grown in all but two years over the same period, offsetting volatility inherent in non-withholding revenues. Business franchise tax revenues have grown on an average annual basis by 5% over the same period, though historical performance reflects greater volatility than the personal income tax sources. Fiscal 2009 available income tax and business franchise tax collections, net of amounts refunded, declined 16% and 18.4%, respectively, from fiscal 2008 levels. While fiscal 2009 non-withholding receipts declined by 67% from fiscal 2008 levels, withholding revenues grew by 1.7%. Fiscal 2010 net income tax revenues are projected to increase by 7.4% from fiscal 2009 levels while net business franchise tax revenues are projected to increase by 3.2% from fiscal 2009 levels.
The Act authorized just over $2.9 billion in income tax secured revenue bonds, and additional senior bonds cannot be issued unless pledged income tax withholding revenues for any 12 consecutive month period of the preceding 15 months cover projected maximum annual debt service (MADS) by no less than 2 times (x) and total pledged revenues over the same period cover projected MADS by no less than 3x. The District is currently contemplating expansion of the authorization to allow for the use of income tax secured debt to complete the current capital program; the additional bonds test would remain unchanged. Assuming issuance of approximately $4.7 billion by fiscal 2014, projected net revenues for the same year would cover MADS (assuming no allowance for BAB subsidy payments) by approximately 5x. Projected fiscal 2010 net revenues would cover estimated MADS (assuming no allowance for BAB subsidy payments) by 3.3x. The District covenants not to modify the income tax rates, or income levels subject to them, if such modification would reduce MADS coverage of the withholding portion alone over any 12 month period of the preceding 15 months prior to the calculation to less than 2x. Fitch notes that the District's calculation of debt service under the indenture nets out of the calculation the Federal interest subsidy payments to be received in connection with BABs, essentially allowing for greater leveraging of the security.
Pursuant to a collection agreement, approximately 76% of fiscal 2009 pledged revenues flowed directly to a lockbox account with the collection agent who sweeps funds daily to the trustee for application to the accounts created under the indenture. The trustee is required to set aside one-third of the ensuing fiscal year's debt service from the first dollars received in the months of April, May, and June, effectively funding debt service months in advance of the following fiscal year's payments. With respect to SIFMA index bonds, the District will set aside principal per an amortization schedule which closely matches that of the series 2008B GO variable-rate bonds being refunded as the SIFMA bonds are expected to be redeemed prior to maturity. However, if notice of intent to refund any outstanding SIFMA bonds prior to maturity is not delivered, the trustee will begin to retain monies to cover SIFMA principal payments due 60 days prior to the stated maturity. After debt service has been provided for as noted above, remaining available monies may flow to the District's general fund.
Series 2010C proceeds will refund the District's outstanding series 2008B variable-rate GO bonds. This transaction is part of a debt restructuring effort, which, among other outcomes, will enable the District to continue its capital program while maintaining compliance with the Debt Ceiling Act enacted in 2009, which statutorily limits debt service to 12% of expenditures. The restructuring will provide limited budgetary relief in the next few fiscal years and will continue efforts to reduce the District's variable-rate debt exposure. The District intends to refinance the series 2010C bonds at or before their stated maturities with the issuance of new index bonds, variable-rate demand bonds, fixed-rate bonds, or by other means in order to maintain the original amortization of the series 2008B bonds being refunded. Fitch is comfortable with the ability of the District to execute such refinancings given the adequacy of the timing provisions, the relatively modest size of the maturities, and the District's demonstrated market access.
Applicable criteria available on Fitch's web site at 'www.fitchratings.com' include:
--'Tax-Supported Rating Criteria', dated Dec. 21, 2009;
--'U.S. Local Government Tax-Supported Rating Criteria', dated Dec. 21, 2009;
--'U.S. State Government Tax-Supported Rating Criteria', dated Dec. 28, 2009.
Additional information is available at 'www.fitchratings.com'.
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE '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.
Contacts:
Fitch Ratings, New York
Kenneth T. Weinstein, 212-908-0571
Amy
Laskey, 212-908-0568
or
Media Relations:
Cindy Stoller,
212-908-0526
Email: cindy.stoller@fitchratings.com