TEXT - Fitch revises Missouri's Chesterfield Valley Trans Dev District outlook
Jan 3 - Fitch Ratings has taken the following action on Chesterfield Valley Transportation Development District, MO's (the district) bonds: --$16.1 million series 2006 transportation sales tax revenue bonds affirmed at 'BB'. The Rating Outlook is revised to Positive from Stable. SECURITY The bonds are limited obligations payable solely from the net revenues of a 0.375% sales tax on retail sales collected within the district, subject to annual appropriation. The sales tax expires February 2031, five years after the final maturity of the bonds. There is also a cash-funded debt service reserve fund (DSRF) with a $2.03 million funding requirement; the DSRF is currently fully funded. KEY RATING DRIVERS RECENT SALES TAX IMPROVEMENT: The Positive Outlook reflects continued progress in expansion of the sales tax base with the planned opening of two sizeable outlet centers on track for later this year. IMPROVING BUT VOLATILE REVENUE: Sales tax collections for 2011 and 2012 were up considerably versus prior years, reflective of an improved local economy, but inherently remain subject to cyclical volatility. REVENUE UNDERPERFORMANCE & DSRF RELIANCE: Revenue performance remains consistently below expectations at the time of issuance, triggering a reliance on the cash funded debt service reserve fund for the past three years. Strong revenue performance of late and an expanded base should aid the district in eliminating its dependence on the DSRF over the near term. BULLET MATURITY & REQUIRED TURBO: Fitch views the debt structure as generally weak with interest only payment requirements between 2017 and 2025 and a bullet maturity in 2026. However, in the event excess revenues start flowing, the structure does require early redemption. ACCESSIBLE LOCATION: The district encompasses a five mile commercially attractive retail corridor along Interstate 64 which caters to the affluent St. Louis County region. WHAT COULD TRIGGER A RATING ACTION SALES TAX BASE EXPANSION: An evident expansion of the sales tax revenue base from the upcoming opening of two outlet malls would likely enhance pledged revenues, debt service coverage and overall credit quality. CREDIT PROFILE The district encompasses a sizable 7.43 square mile area located along a five-mile corridor of Interstate-64 in western St. Louis County. As of December 2012, there were 374 retail establishments located within the district. SALES TAX REBOUND Sales tax revenues for the first 10 months of 2012 increased by a robust 7.5% over same period collections in 2011. The district expectation for full year collections are to show a 7.1% year over year increase in revenues, incorporating management's projected sales tax revenues for the remaining two months of 2012. Fitch believes this is a conservative projection given recent sales tax trends. Assuming projections are achieved, 2012 will be the first year since 2008 in which revenues exceeded current debt service requirements. This growth follows an 8.5% increase in sales tax revenues in 2011 compared to 2010. RECENT REVENUE SHORTFALLS Between fiscals 2007 and 2010, sales tax collections in the district fell by nearly 16%. The decline was mostly attributable to the recession but also due partly to a one month payment lag in 2010, created when the state assumed sales tax collection responsibilities from the city of Chesterfield (the city) in early 2010. In addition, the 2006 issue was structured based on over-optimistic sales tax projections, leading to marginal debt service coverage from the onset. Sales tax revenues were insufficient to meet debt service requirements as a result of these declines, forcing the district to draw upon the DSRF annually beginning in 2010. Draw-downs totaled $183,000 in 2010, $399,000 in 2011 and $404,000 in 2012 to cover 11%, 24% and 24% respectively of the larger April principal and interest payments in those years. In all three years, the DSRF requirement was restored before the end of the year as sales taxes were received and deposits were made per the flow of funds. Management is projecting a smaller $350,000 (18%) draw in April, 2013, with additional draws in 2014 and 2015. After 2015, debt service drops significantly until 2026. Fitch views the bond structure as weak with a large bullet maturity in 2026 and interest payments only from 2017 through 2025. However, in the event revenues exceed debt service requirements, all excess sales tax revenues are required to redeem the 2026 bullet via a mandatory redemption feature. To date the turbo feature was only triggered once in 2008 due to general underperformance of revenues compared to projections at the time of issuance. Assuming projected 2012 sales tax levels and no subsequent growth, Fitch's analyses indicate that pledged revenues and DSRF monies should be more than adequate to cover all debt service requirements. Under Fitch's stress scenario, sales tax collections could decline by 10% in 2013 and an additional 4% annually over the life of the issue and, with remaining DSRF monies, still meet all debt service requirements. The largest revenue decline to date was 7.6% in 2010. SALES TAX CONCENTRATION The district encompasses a sizable 7.43 square mile area located along a five-mile corridor of Interstate-64 in western St. Louis County. As of December 2012, there were 374 retail establishments located within the district, comprising one of the largest concentrations of big box retailers in the region. There is point-of-sale concentration with the top 15 payers accounting for 55% of total sales tax collections, which is not uncommon for a retail complex with sizeable big box presence. The district contains in excess of seven million square feet of development with over 10% of the total land area still undeveloped. The district expects four large stores recently opened to be top 20 sales tax generators. In addition, the district reports that two large outlet malls contemplated last year are currently under construction by Simon Property Group and Taubman and on track to open in August, 2013. The addition of these two malls would notably expand the sales tax base which Fitch believes could have a positive impact on the rating. WEALTHY, GROWING SERVICE AREA Wealth levels in the city and county are well above state and national averages, and unemployment rates are below comparable levels for the state and country, rebounding from increases during the recent economic downturn. The county supports a diverse economic base, which includes Boeing and Washington University. The city has several major economic development projects underway, highlighted by significant growth at Mercy, a large health care system headquartered in the city, as well as the relocation of the headquarters of Reinsurance Group of America to Chesterfield. These projects will bring a sizable number of workers to the area, increasing the population of potential shoppers within the district. APPROPRIATION RISK The district is managed by a four-member board consisting of representatives of the city and county. The pledged sales tax is subject to annual appropriation by the district. However, non-appropriation is unlikely as the pledged sales tax cannot be used for non-district purposes. Furthermore, if the district fails to adopt a budget in any year, the prior year's budget will remain in effect. WEAK LEGAL PROVISIONS The bond documents are loosely written, allowing for liberal issuance of additional parity debt. However, officials indicate that there are no plans to issue more bonds and an independent board composed of various county and city officials would be expected to curtail excessive issuance.