Fitch Ratings has assigned the following ratings to Santa Ana Redevelopment Agency (RDA), California's (the agency) bonds:
--$59.9 million Tax Allocation Bonds (TABs)(Merged Project Area), series A, 'A+';
--$5.9 million TABS (Merged Project Area - Taxable Recovery Zone Economic Development Bonds), series 2010B, 'A+'.
The bonds will sell via negotiated sale on or about Dec. 15, 2010.
The Rating Outlook is Stable.
RATING RATIONALE:
--The 'A+' rating reflects the project area's maturity, large size, adequate diversification among the largest taxpayers, sound legal structure, and solid debt service coverage levels that stand up well to Fitch-designed stress tests.
--Although the top taxpayers are adequately diversified the project area land use is concentrated in commercial and industrial properties, which could be exposed to rising appeals levels. In addition, the project area has significant exposure to unsecured assessed valuation (AV); however, a material portion of the unsecured AV consists of leasehold interests, which somewhat mitigates concerns regarding volatility of unsecured property values.
--The local economy benefits from its size, diversification, and its location in Orange County near several freeways and state highways and public transit options. However, local economic indicators are weak, exhibited by low income levels, high unemployment, a weak housing market, and a significant AV contraction in fiscal 2011.
--The agency's debt profile is sound. Although amortization is somewhat below average, direct debt levels are low, capital needs are manageable, and management has no plans to issue debt over the intermediate term.
KEY RATING DRIVERS:
--Debt service coverage levels are solid and Fitch expects them to remain so in spite of the potential for short-term tax increment deterioration.
--Current leverage levels are quite manageable given tax increment projections, and Fitch expects limited leveraging over the intermediate-term.
SECURITY:
The bonds are secured by a senior lien on gross tax increment, net of housing set-asides and pass-throughs to various entities. Also, debt service on certain 2003 TABs is senior to these bonds as it applies to tax increment from the South Main Street sub-project area only. The agency participates in the county's Teeter Plan, whereby the county guarantees the agency will collect 100% of levied taxes, regardless of delinquencies.
CREDIT SUMMARY:
The agency's merged project area is comprised of six formerly separate project areas scattered throughout the city that were merged by a city ordinance in 2004. The merged area includes mainly commercial and industrial properties, including historic downtown areas, with a limited residential component. The total merged area is a large 4,989 acres, which makes up 29% of the city area. The commercial portion (43.9% of the project area's AV) includes a one million square foot mall, big box retailers, and auto dealers. Management reports that retail vacancy rates for the Orange County region are a low 8.7%, however, retail sales peaked in 2006 and have fallen since. The industrial portion of the project area (26.8% of AV) benefits from being the only portion of Orange County classified as an enterprise zone. Tenants include enterprises involved in aircraft manufacturing, medical instruments, check processing, and green industries. Although the project area is mostly built out, opportunities for in-fill development and a limited amount of vacant space has allowed for a limited degree of ongoing development in spite of the economic downturn. Projects currently under construction include a Marriott Courtyard, downtown lofts, and an expansion of an auto dealer. Additionally, underutilized large lots are in the process of being re-zoned, which could make them attractive for higher-density developments.
The economy of Santa Ana benefits from its size, diversification, and location within a major regional employment market with a strong transportation network. However, economic data points to signs of stress. September unemployment registered a high 15%, and household income levels are well below regional levels, though slightly above national levels. The local housing market experienced extremely high foreclosure rates in 2008 and 2009, however, foreclosures have fallen in 2010 to nearly national levels. Nonetheless, negative amortizing mortgage concentration and delinquencies are high, which may cause resumed foreclosure weakness in the short to intermediate term. Real estate weakness caused a significant 6.7% AV decline for fiscal 2011.
The top 10 taxpayers are adequately diversified, making up 14.6% and 18.2% of AV and incremental valuation (IV), respectively. The largest taxpayer, Mainplace Shoppingtown, is a one million square foot mall owned by Westfield and makes up 3.3% of AV (4.1% of IV). At least one of its anchor tenants is expanding. The next largest taxpayers include SFI MacArthur Place, owner of luxury rental units, and First American Title, which has been headquartered in the city since 1968. From fiscal 2006-2008 taxpayer appeals had resulted in immaterial reductions to AV. However, the percentage AV reduction applied to original values rose to a moderate 3.4% from 0.6% the year prior. In fiscal 2010 they rose further to 4.8%. Appeals data is not available for fiscal 2011. For the sake of conservatism, Fitch has assumed an increase in appealed AV losses of 16% in its base case projection, up from 3.4% the year prior.
Coverage levels currently are solid and hold up well to severe Fitch-designed stress scenarios. Fitch estimates maximum annual debt service coverage (MADS) for fiscal 2011 at 2.61 times (x). Base coverage for fiscal 2012, including very conservative appeals assumptions, declines to a still solid 2.41x. The loss of the top 10 taxpayers would lower MADS coverage to a still sound 2.14x, and AV would have to fall by nearly 50% for MADS coverage to reach 1.0x. Capital needs are manageable, and management has no plans for parity debt issuances over the intermediate term. Debt service escalates, peaking in fiscal 2025, and direct debt levels are low.
Legal covenants are sound overall. The additional bonds test requires a standard 1.25x MADS coverage for existing and proposed debt, however, the test is weakened somewhat by including anticipated AV increases through ownership transfers and new construction. The debt service reserve fund requirement also is standard, requiring the least of 100% MADS, 125% of average annual debt service, or 10% of outstanding par. The debt service reserve fund will be cash funded.
Additional information is available at 'www.fitchratings.com'
In addition to the sources of information identified in the Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, LoanPerformance, Inc, Underwriter, and Financial Advisor.
Applicable Criteria and Related Research:
'Tax-Supported Rating Criteria', dated 16 Aug 2010.
'U.S. Local Government Tax-Supported Rating Criteria', dated 08 Oct 2010.
For information on Build America Bonds, visit www.fitchratings.com/BABs.
Applicable Criteria and Related Research:
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564566
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548605
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