TEXT - Fitch affirms Overland Park Development Corp, Kansas revs
Jan 22 - Fitch Ratings takes the following rating action on Overland Park Development Corporation, Kansas (the corporation): --$64.9 million outstanding (Overland Park convention center hotel project) second tier refunding revenue bonds, series 2007B affirmed at 'BB'. The Rating Outlook is Stable. SECURITY The bonds are special limited obligations payable solely from a subordinate lien on the net operating revenues of the convention hotel, a senior lien on a 4.5% citywide transient guest tax (TGT), subject to annual appropriation, and a cash funded debt service reserve funded to the IRS standard. The bonds also have a subordinate lien on the net operating revenues and leasehold interest of the convention hotel and the 1.5% TGT supporting the superior lien bonds. KEY RATING DRIVERS NOMINAL CREDIT FOR NON-TAX REVENUE: The speculative grade 'BB' rating reflects the inability of the dedicated 4.5% portion of the TGT to sustain 1x coverage for debt service. Fitch gives little weight in its rating to the subordinate pledge of net operating revenue from the single site convention center hotel given its erratic revenues historically and the difficulty in quantifying future revenues. MARGINAL DEBT SERVICE COVERAGE: Total pledged revenues provided 1.3x coverage in 2011 and are projected to provide 1.2x to 1.3x coverage in 2012. ASCENDING DEBT SERVICE: Continued revenue growth from the citywide hotel tax and/or the convention center hotel is necessary to sufficiently service the ascending debt service load. NEGLIGIBLE NON-APPROPRIATION RISK: Non-appropriation risk of hotel tax revenues is low given the potential loss of the convention center hotel coupled with the strong financial management of the city of Overland Park (rated 'AAA' by Fitch). STRONG LOCAL ECONOMY: Fitch believes the city's deep and diverse economy supports sustainable long-term hotel demand despite recent weaknesses. WHAT COULD TRIGGER A RATING ACTION DETERIORATION OF COVERAGE: TGT performance has been mixed so far in 2012. Sustained deterioration in TGT collections would present a credit concern and could lead to a rating downgrade. CREDIT PROFILE The corporation is a component unit of the city of Overland Park, and benefits from its proximity to the Kansas City metro area. It is a not-for-profit corporation created for the sole purpose of constructing and owning a 412-room convention hotel located adjacent to the city's convention center. The corporation board is comprised of six members of the city's governing body, appointed by the mayor and approved by the city council. The convention hotel opened in December 2002 and is operated as a Sheraton hotel under a hotel operating agreement with Starwood Hotels & Resort (Fitch Issuer Default Rating 'BBB', Outlook Stable) that expires in November 2022. The city's convention center opened in 2002 and primarily hosts regional business and community needs in 60,000 square feet of exhibit space and a 25,000 square foot ballroom. LEGAL STRUCTURE Primary support for the rating is derived from the coverage generated from the first lien on the 4.5% and second lien on the 1.5% citywide TGT imposed upon the roughly 5,200 available hotel rooms located within the city. A citywide hotel tax has been levied since 1982 and is collected by the state and remitted to the city quarterly minus a 2% collection fee. Little weight is given to the subordinate pledge of net revenues from the convention hotel. However, Fitch notes that in recent years, net hotel revenues have provided support for the superior lien bonds, freeing up much of the additional 1.5% TGT revenues upon which the bonds have a subordinate lien. Overland Park has covenanted to budget sufficient citywide hotel tax revenues to pay the next year's debt service on the bonds pursuant to a debt service support agreement between the city and the corporation. However, the allocation of TGT revenues is subject to annual appropriation and is capped at amounts received solely from the 4.5% and 1.5% TGT. Once the city appropriates funds, the obligation is absolute and unconditional without abatement, deduction or set-off and counterclaim. The commitment of citywide TGT revenues can be released if debt service coverage from net revenues of the convention hotel exceeds a certain threshold; however, these revenues would be reinstated if coverage subsequently fell below 1.75x at any time through maturity. Other legal provisions, which only provide meaningful credit strength in the unlikely event that the hotel tax commitment is released, include the crediting of all convention hotel revenues under a lockbox agreement with the trustee, and a 1.05x rate covenant. HISTORICAL REVENUES AND COVERAGE The citywide hotel tax experienced a compounded annual growth rate of 6.1% between 1994 and 2006, and the city reasonably forecasted 3.7% annual increases between 2007 and 2018. Based on the 2007 forecast, available hotel tax revenues were projected to fully cover annual debt service at least 1.4x throughout the life of the bonds. However, due to the severity of the economic recession, actual TGT revenues averaged a 2.4% decline over the past three years (2008-11) with actual coverage of 1.0x in 2011 from the 4.5% TGT tax alone. GROWTH REQUIREMENTS FOR COVERAGE The bonds are also supported by a cash funded debt service reserve totaling $6.6 million. If estimated 2012 hotel tax revenues were held flat and no revenues were received from the net operating revenue pledge, the debt service reserve would be exhausted by 2018. Based on Fitch's calculations, 3.2% annual growth in citywide hotel tax revenues plus amounts in the debt service reserve would be necessary to sufficiently satisfy debt service in all years, relying only upon the 4.5% portion of the TGT upon which the bonds have a first lien. COMBINED PLEDGED REVENUES COVERAGE Net operating revenues from the convention hotel and other balances have enhanced debt service coverage in recent years. Coverage of debt service available TGT revenues has hovered around 1x, and will remain pressured as debt service requirements escalate. Combined pledged revenues in 2010 and 2011 covered annual debt service 0.9x and 1.3x respectively. However, 2011 combined pledged revenues cover maximum annual debt service maturing in 2032 by only 0.5x because of the ascending debt service structure. ECONOMY DRIVES FUTURE HOTEL TAX PERFORMANCE Citywide hotel occupancy historically has been driven by individual and group business travelers. Local demand for hotels wavered somewhat in recent years due to both the protracted economic recession and Sprint Nextel Corporation's reduced presence within the city. However, as a positive development, several other major corporations have sublet space on the Sprint campus, which has led to increased hotel demand. The city encourages demand by tying economic incentives to hotel usage and a recently constructed soccer/sports complex contributes to hotel demand. Citywide hotel occupancy increased 0.8% through October 2012, and the average daily room rate is up 3.3%. STRONG LOCAL ECONOMY Overland Park is the second largest city in the state of Kansas and located within the Kansas City metropolitan area. The region benefits from a deep and diverse local economy, an extensive transportation network, available land, and a well-educated workforce. Several Fortune 500 companies are located within the city. The financial services and professional and business service sectors account for a greater percentage of total countywide employment compared to the national average.
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