TEXT - Fitch raises Unified Gov't of Wyandotte Cty/Kansas City
Jan 30 - Fitch Ratings takes the following rating action on the Unified Government of Wyandotte County/Kansas City, Kansas: --$167 million subordinate lien capital appreciation series 2010B bonds (redevelopment project area B) upgraded to 'BBB+' from 'BBB'. The Rating Outlook is Positive. SECURITY The bonds are special limited obligations payable from a senior lien on sales and hotel taxes collected within Village West. SENSITIVITY/RATING DRIVERS DELEVERAGING DRIVES POSITIVE RATING ACTION: The upgrade to 'BBB+' reflects the ascension of the bonds to senior lien status upon the recent early redemption of the formerly senior series 2005 bonds. Conditions appear favorable for accelerated turbo redemption of bonds. The first turbo redemption occurred in December 2012, providing a cushion against potential future revenue declines. PAYER CONCENTRATION: Pledged revenues generated within the Village West Redevelopment Area (Village West) are primarily derived from a highly concentrated base of retail establishments. ECONOMICALLY SENSITIVE REVENUES: Pledged revenues include inherently volatile sales and hotel taxes. Recent trends have been favorable; however, future variability may be amplified by scheduled reductions in the sales tax rate and the cap on the state portion of the sales tax. ADEQUATE COVERAGE: Pledged revenues, even assuming modest annual declines, are adequate to retire all outstanding debt. COMPLEX REPAYMENT STRUCTURE: The outstanding bonds have a complex repayment structure, including different lien levels, a cap on certain sales tax receipts, a large zero coupon maturity, and turbo redemption features. POSITIVE SOCIOECONOMIC PROFILE: The socioeconomic profile of the Kansas City metropolitan statistical area (MSA) is positive, although key demographics for Wyandotte County are somewhat less attractive. WHAT COULD TRIGGER A RATING ACTION TURBO REDEMPTION: The prepayment of principal from excess pledged revenues resulting in a material deleveraging of the revenue stream would likely lead to an upgrade. CREDIT PROFILE SECURITY MECHANICS Pledged revenues consist of state and local sales and compensating use tax revenues (retail sales tax), which accounted for 97% of total collections in 2012, and transient guest (hotel) tax revenues, which accounted for the remainder. The net retail sales tax totals 8.8615%, consisting of 6.3% from the state, 0.9365% from Wyandotte County, and 1.625% from the city. The state sales tax rate was increased by 1% to 6.3% effective July 1, 2010; however, the rate is scheduled to be scaled back to 5.7% after July 1, 2013. The city sales tax was increased by 0.375% for a 10-year period to 1.625% effective July 1, 2010. The net hotel tax of 7.84% has been in effect since Jan. 1, 2009. The state has capped its total sales tax contribution at $144.5 million for repayment of the series 2010B bonds pursuant to the STAR Bonds Financing Act; however, 100% of all other tax sources are pledged through the term of the bonds. LARGE REGIONAL DRAW Village West was created in 1999 on a 400-acre tract of land located at the intersection of I-70 and I-435 about 15 miles west of downtown Kansas City. Development within Village West began in 2001, and currently all but nine acres is developed. Village West is anchored by Nebraska Furniture Mart (NFM), Cabela's, and Great Wolf Lodge (GWL). In addition to the anchor stores, there are 68 retail stores, 28 restaurants and eateries, five hotels with 445 total rooms, a 14-screen movie theater, a major league soccer stadium, and a minor league baseball stadium. The Kansas Speedway, an outdoor water park, and a casino are located adjacent to but outside Village West's borders. Bondholders do not directly benefit from the three aforementioned venues; however, the enterprises generate ancillary traffic within Village West. Proposed future phases at both the water park and the casino include restaurants, hotels, and retail space. The potential effect of these competing retail options on future pledged revenues is uncertain. POINT-OF-SALE CONCENTRATION The top five establishments located within Village West generated a concentrated 72% of total pledged revenues. The concentration is down from 91% in 2005; however, notable dilution from the current level is not anticipated. NFM, Cabela's, and GWL consistently have been in the top five of revenue generators since their openings. All the aforementioned enterprises own their space and most have non-compete clauses pursuant to certain agreements. Legends, the outlet mall at the site, has remained open while in receivership and was recently sold to a new owner at auction. NFM opened within Village West in August 2003 and encompasses 450,000 square feet of retail space and sells furniture, floor coverings, appliances, and electronics products. Cabela's opened in August 2002 and encompasses 116,666 square feet of retail space and sells hunting, fishing, camping, and related outdoor merchandise. GWL opened inMay 2003 and is a 281-room theme hotel with an attached indoor water park. The loss of or acute deterioration in retail activity at any of the primary establishments would have a materially adverse impact on the repayment of the series 2010B bonds. Turbo redemption of the bonds, which began late last year, will generate margins of protection against potential variability in the pledged revenue stream. VARIABILITY IN REVENUE STREAM Pledged sales and hotel tax revenues recently have demonstrated strong growth, increasing over 14% annually in each of the past two years. Such growth points to a rebounding economy, and underscores the cyclical nature of the nature stream, which remains vulnerable to future economic downturns. The reduction of the sales tax rate from 6.3% to 5.7% scheduled to take effect July 2013 and the cap on the total dollar amount of state sales tax contribution accentuate variability in revenue forecasts. COMPLEX REPAYMENT STRUCTURE The series 2010B bonds are on parity with $3.78 million in outstanding subordinate lien series 2004 bonds and $12.785 million in outstanding subordinate lien series 2012 bonds. The 2nd lien series 2005 bonds, which held a prior lien on the revenue stream, have been retired and that lien is closed. The debt structure for the (now senior) lien obligations requires that any excess pledged revenues after payment of scheduled parity debt service is then used to turbo outstanding principal of the series 2004 and 2010B bonds, on a pro-rata basis. The 2012 serial bonds are not subject to early redemption. Fitch calculates that pledged revenues should be sufficient to repay the series 2010B bonds by their stated maturity of 2021 under a stress scenario where sales tax revenues decline by 8% annually. ADDITIONAL BONDING PLANS CREDIT NEUTRAL Fitch views officials' consideration of issuing $10 million of parity debt later this year as a credit neutral as overall leverage will continue to decline. No additional bonds may be issued on a senior lien basis to the series 2010B bonds. The issuance of additional parity lien debt secured by the pledged revenues requires the approval of both the state secretary of commerce and the state secretary of revenue. An additional bonds test further requires the projected pro forma weighted average life of each series of bonds (at the time of issuance of the additional bonds) to be no greater than six months more than the initial weighted average life of each series of bond (calculated at time of issuance of the 2010B bonds).
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