TEXT-Fitch affirms Troy Downtown Development, Mich. TIBs at 'C'

Tue Nov 27, 2012 2:17pm EST

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Nov 27 - Fitch Ratings affirms its 'C' rating on the following Troy Downtown
Development Authority, Michigan's (the authority) tax increment bonds (TIBs):

--$10.5 million outstanding development and refunding bonds, series 2001;

--$2.6 million outstanding community center facilities junior lien bonds, series
2003.

The rating on the series 2001 bonds does not consider the benefit of bond
insurance, which is provided by National Public Finance Guarantee.

SECURITY

The series 2001 bonds are secured solely by a first lien on incremental ad
valorem taxes generated within the authority's boundaries. Payment of the series
2003 junior lien bonds is subordinate to the payment of the series 2001 senior
lien bonds.

KEY RATING DRIVERS

ONGOING TAX BASE EROSION: Taxable values continue to fall, declining by 8.2% in
fiscal 2013 (beginning July 1). Over the past four years the tax base has lost
nearly one third of its value while the highly leveraged tax increment plummeted
by 87%.

REVENUES FAIL TO COVER DEBT SERVICE: In recent years, tax increment revenues
have fallen increasingly short of annual debt service costs, requiring extensive
use of operating reserves to close the gaps. The authority projects that the
debt service reserve fund (DSRF) will be tapped in 2013 with the May interest
payment date absent city intervention. Fitch's cash flow projections concur with
this scenario.

NEGATIVE PROSPECTS FOR ANY NEAR-TERM RECOVERY: The relative maturity of the
redevelopment area, the glut of available office space and statewide
restrictions on assessed value growth make it highly unlikely that a meaningful
recovery in the authority's tax base will occur in the foreseeable future.

VERY HIGH COMMERCIAL VACANCY RATES: The redevelopment area represents the city's
commercial and retail core, but vacancy rates among the large number of office
and commercial properties remain high.

WHAT COULD TRIGGER A RATING ACTION

CITY ACTION REQUIRED TO PREVENT DEFAULT: A bond default will occur unless the
city acts beyond its legal obligation and provides substantial financial
assistance.

CREDIT PROFILE

TAXABLE VALUES CONTINUE TO SLIDE

The authority's tax base continues to shrink with a reported 8.2% drop for
fiscal 2013, the fourth consecutive yearly decline. Since fiscal 2009, taxable
values within the redevelopment area have fallen by nearly one third while the
tax increment, burdened by relatively high base year values, lost a precipitous
87% of its value. The fiscal 2013 taxable value reduction was less than the city
assessor's projected 12% to 14% drop. However, this was due to unexpected
favorable court decisions on property tax appeals rather than any significant
movement in the local real estate market. Projections for assessed valuation for
the development area and the county suggest continued negative adjustments.

FALLING REVENUES DRAIN RESERVES

As increment values have withered, tax increment revenues generated within the
redevelopment area are falling well short of covering annual debt service.
Fiscal 2013 tax increment revenues total $500,000 or only 14% of the annual debt
service requirement. By the end of fiscal 2013, the authority projects
conservatively and Fitch cash flow projections concur that it will have used all
of its remaining operating reserves to plug the revenue gap and will tap its
debt service reserve. Positive variation in operations may push this scenario
out to the November 2013 principal and interest payment. The $3.2 million
reserve fund provides about one additional year of coverage with the assumption
that the trustee will release substantially all of the funds for the benefit of
bondholders.

BONDS POISED TO DEFAULT WITHOUT EXTERNAL SUPPORT

The city property assessor projects much smaller declines in taxable values over
the next four years, ranging from 2% to 4% annually. The redevelopment area's
largely commercial properties have been devastated by the sharp downturn in
office and commercial real estate. However, as the tax increment currently
yields negligible increment revenues, the magnitude of further losses will have
no appreciable effect upon the authority's timetable for expected default. The
projected valuation decreases in fiscals 2014 and 2015 would reduce the
redevelopment area's tax base to base year levels, completely wiping out the tax
base increment.

Any near-term recovery of the tax base is unlikely given the depths of the real
estate downturn, the overcapacity of the city's office market, and state
constitutional limitations on year to year assessment growth. Fitch believes
that, absent forceful city intervention, the bonds will default within the next
two years.

NO LEGAL OBLIGATION FOR THE CITY TO PROVIDE FINANCIAL ASSISTANCE

The city is not legally obligated to provide support to the bonds. The city has
few viable options available to address the authority's predicament outside of
direct financial intervention. These include refunding the tax increment bonds
with city general obligation debt and providing direct financial assistance to
the authority.

The issuance of general obligation debt by the city of Troy to refund the
authority debt would eliminate default concerns, but may require voter
authorization. The city, with city council approval, also has the option to levy
a two mill property tax within the redevelopment area to support authority
operations. However, the two mill levy would raise less than $1 million at
projected assessed valuations, which when combined with the tax increment, would
still be woefully inadequate to cover the approximate $3.4 million of annual
debt service requirements. In fact, the additional revenues would not slow the
pace of reserve drawdowns or buy additional time for conditions to improve.
Managerial turnover at the city has delayed the city's decision on a course of
action for several months.

REDEVELOPMENT AREA INCLUDES EXTENSIVE RETAIL & OFFICE PROPERTIES

Troy (LTGO rated 'AA+'; Outlook Stable by Fitch) is an affluent bedroom
community in Oakland County located 14 miles north of downtown Detroit. The
redevelopment area encompasses 772 acres and includes the retail and commercial
core of the city. In addition to the presence of an upscale regional mall, the
area contains an extensive number of office and commercial properties, including
several corporate headquarters. The tax base is concentrated, typical of tax
increment bonds, with the top ten taxpayers representing 45% of taxable values.
Only three authority bond issues remain outstanding, including one junior lien
and two senior lien bond issues; all are scheduled to mature by November 2018.

RECENT JOBS GROWTH MAY PORTEND ECONOMIC STABILIZATION

The city's above average wealth is indicated by city per capita income levels
which are 163% and 151% above the state and national averages, respectively.
Unemployment rates hovered around 11% in 2009 and 2010 but dropped considerably
in 2011 to under 9%. February 2012 unemployment rates fell to 8.3%, in line with
the state average (8.2%) and below the state and national averages.

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 additionally informed by information from
Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index,
IHS Global Insight, National Association of Realtors.

Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria
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