Fitch Ratings assigns an 'A+' rating to the following Bexar County, TX bonds:
--$27.2 million tax-exempt venue project revenue refunding bonds (motor vehicle rental tax), series 2013;
--$100.2 million tax-exempt venue project revenue refunding bonds (combined venue tax), series 2013.
In addition, Fitch affirms the 'A+' rating on the following outstanding venue project bonds:
--$60.3 million venue project revenue bonds (motor vehicle rental tax);
--$154.3 million venue project revenue bonds (combined venue tax).
The Rating Outlook is Stable.
SECURITY
Motor vehicle rental tax bonds are payable from a first lien on motor vehicle rental taxes (MVRT). Combined venue tax bonds are payable from a first lien on hotel occupancy taxes (HOT) and a junior lien on MVRT.
KEY RATING DRIVERS
LARGE, MATURE HOSPITALITY SECTOR: Pledged revenues benefit from the county's position as the top tourist destination in Texas. MVRTs and HOTs are subject to economic volatility but benefit from the county's large convention and visitor industry which markets to both regional and national audiences.
LOW COVERAGE; LARGE RESERVE: Annual debt service coverage (DSC) for the combined venue tax bonds is very thin. Fitch considers accumulated venue taxes in the capital improvement and coverage fund (CICF), which are restricted for debt service, capital improvements, or bond redemption, as a key mitigating credit factor. The current balance in the CICF is sizeable and the county has no plans to use the fund. DSC for the MVRT bonds is projected to remain sound.
WEAK ABT: For both securities, in order to issue additional parity bonds, pledged revenues must be at least equal to 1.25 times (x) average annual debt service, which Fitch considers to be below average.
NO EXPECTED OPERATING EXPOSURE: The county is not expecting to be responsible for the sizeable operations and maintenance costs of the numerous bond-financed projects due to negotiated memorandums of understanding with non-profit organizations. However, Fitch recognizes that these agreements may be subject to change in the medium or long term due to unforeseen circumstances.
HIGH COMMUNITY SUPPORT: The county voters' support for the venue tax extensions was notable for its high approval margin.
WHAT COULD TRIGGER A RATING ACTION
DEPLETION OF CAPITAL IMPROVEMENT AND COVERAGE FUND: The use of the CICF reserves for any purposes other than bond redemption would remove a significant offsetting credit strength and could lead to a negative rating action.
CREDIT PROFILE
Voter Approved Venue Taxes
In May 2008, county voters approved the extension of the existing 1.75% HOT and 5% MVRT, originally approved in 1999 to finance the construction of the AT&T Center, home of the NBA Spurs. The extended venue taxes, which are not capped or restricted for specific amateur sports or tourism projects, will finance $415 million in new tourism projects, including San Antonio River projects ($125 million), amateur sports projects ($80 million), rodeo and arena enhancements ($100 million), and cultural arts projects ($110 million).
Large Hospitality Sector Benefits Pledged Revenue Base
Pledged revenues are supported by presence of five of the state's top 10 tourist attractions, including the Alamo, the San Antonio Riverwalk, Sea World, Six Flags over Texas, and the San Antonio Zoo. After strong growth through fiscal 2008, HOT and MVRT revenues declined by 15.5% and 6.4%, respectively, in fiscal 2009, before rebounding by over 5% in fiscal years 2010-2011. Unaudited fiscal 2012 MVRT and HOT receipts continue on a positive trajectory, increasing by 7.2% and 6.6%, respectively.
The inventory of hotel rooms grew by a notable 26% from 2007-2011 and additional hotels are under construction (although the county's conservative forecast assumes flat pledged revenue growth which Fitch views favorably).
Additional Parity Debt To Reduce Coverage
The current offerings will refund short-term subordinate lien bonds recently issued by the county. Post-refunding, over 82% of the planned venue tax CIP will have been funded, leaving $75 million in remaining bond authorization, all of which will be secured by the combined venue tax pledge.
Including the current offering, annual debt service (ADS) coverage declines to a minimum of 1.4x for the MVRT bonds based on unaudited fiscal 2012 revenues which Fitch considers adequate for the rating level. However, ADS coverage of the combined venue tax bonds declines to a notably thin 1.15x by 2014. The county's 1.25x additional bonds test, which Fitch considers below average, is based on average ADS and is met successfully due to a solid 6.8% unaudited gain in combined receipts in fiscal 2012.
Large Reserves Buffer Thin Coverage
The CICF totaled $62.5 million at the beginning of fiscal 2012, equal to over four years of debt service payments. The CICF can only be used for debt service, capital improvements, and bond redemption, which Fitch's considers a key offsetting credit strength to thin coverage levels of the combined venue tax bonds. The CICF reserves are especially important under Fitch's stress scenarios in which revenues experience declines equal to those posted during the 2009 recession. The maintenance of large CICF reserves will remain paramount given the county's plan to issue $75 million in remaining combined venue tax bonds by 2016.
No Operating Impact To County
Fitch also notes that the county does not expect to be responsible for the sizeable operations and maintenance (O&M) costs of the numerous bond-financed projects. O&M costs have been addressed through negotiated memorandums of understanding with non-profit organizations although Fitch notes that such arrangements could evolve over time.
Broad And Expansive Economy
Bexar County, with an estimated 2012 population of 1.8 million, is home to San Antonio. The local economy is broad, consisting primarily of military and government employment, domestic and international trade, convention and tourism, medical and healthcare, financial services, and telecommunications.
Income levels are generally about 10% lower than the U.S. average but only slightly less than state average. However, growth in area income over the past few years has exceeded state and national norms, although the current economic slowdown has slowed this trend. Several major commercial and military projects have helped stabilize or restore economic growth, including the $3.2 billion San Antonio Military Medical Center, which was accompanied by approximately 12,500 additional military personnel to the county.
Aided by considerable growth in the energy sector, the county's unemployment rate, which totaled 6% in October 2012, has declined notably from 12 months prior (7.4%) and remains modestly below the state average but well below the national average.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was informed by information from CreditScope, University Financial Associates, S&P/Case Shiller Home Price Index, HIS Global Insight, Zillow.com, and National Association of Realtors.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria', dated Aug. 14, 2012;
--'U.S. Local Government Tax-Supported Rating Criteria', dated Aug. 14, 2012.
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314
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