Nov 21 - Fitch Ratings has affirmed the following bonds for the city of
--$185.0 million senior lien tourist development tax (TDT) revenue bonds (sixth
cent contract payments) series 2008A at 'BB+';
--$33.4 million second lien subordinate TDT revenue bonds (sixth cent contract
payments) series 2008B at 'B'.
The Rating Outlook is Stable.
The 2008A and 2008B revenue bonds are limited obligations of the city secured by
the discrete trust estate, including pledged funds, for each respective series
of bonds. The majority of pledged funds consist of 50% of a one cent tax levied
county-wide on hotel stays. The hotel tax is collected by the county and
remitted to the city according to an interlocal agreement.
Pledged revenues also include a fixed installment payment payable from the
remaining half of the one cent tax, and equal to $2.8 million available through
2018. Pledged funds are allocated to each trust estate of the three series of
bonds (Fitch does not rate the series 2008C bonds) according to a flow of funds
with revenues distributed to each trust estate according to the seniority of the
series. Additional security is provided by a dedicated liquidity reserve and
debt service reserve fund for each series with each established at 50% of
respective maximum annual debt service (MADS) for a total combined reserve for
each series of 100% of MADS.
KEY RATING DRIVERS
RECOVERING BUT VOLATILE REVENUE STREAM: TDT collections continue to experience
consistent year over year monthly revenue growth, benefitting from a recovery of
the tourism industry as well as a one-time settlement from a lawsuit. With 15%
declines in fiscals 2001-2002 and 2009, the TDT remains economically sensitive
and volatile revenue.
THIN DEBT SERVICE COVERAGE DESPITE TDT GROWTH Debt service coverage for the
senior series 2008A bonds and combined senior bonds and subordinate series 2008B
bonds has improved but remains thin, even with recent TDT growth. Modest revenue
growth for the series A bonds and much more rapid growth for the series B bonds
are required to ensure payment of both series of bonds without a draw upon
SERIES 2008B BONDS FAIL UNDER STRESS SCENARIOS: Under certain Fitch designed
stress scenarios, liquidity reserves and ultimately DSRA holdings will be
insufficient to pay series 2008B debt service requirements in full. Series 2008A
bonds hold up satisfactorily for the current rating to stress scenarios.
RESERVE CUSHION: Each series of bonds was issued with a liquidity reserve equal
to 1/2 maximum annual debt services (MADS) and a debt service reserve account
(DSRA) equal to 1/2 MADS, with the intention that the cushion could provide
sufficient cash flow to compensate against periods of weak revenue performance.
A one-time cash infusion from unused construction proceeds has fully replenished
the liquidity reserve for the series 2008B bonds, and the liquidity reserve for
the series 2008A bonds remains fully funded. There has never been a draw on
BONDHOLDERS PROTECTED UPON CROSS DEFAULT: A default for any of the series
results in a cross default under the indenture. The ensuing flow of funds is
structured to honor the lien status.
NO ADDITIONAL DEBT: Additional debt is prohibited under the indentures,
PREMIER TOURIST DESTINATION: The city is home to Disney World, a world-class
tourist attraction. The strength of the amusement park and other area
attractions has enabled the leisure industry to rebound relatively quickly from
WHAT COULD TRIGGER A RATING ACTION
SUSTAINED TDT GROWTH: Sustained and robust growth in TDT revenues could lead to
positive rating action.
DECLINE IN TDT REVENUE: Conversely, a reversal of recent positive trends could
lead to coverage at levels inconsistent with even the current low ratings.
Pledged TDT revenues continue to expand as monthly collections have consistently
increased on a year over year basis, with two exceptions, since February 2010.
The first exception was a negligible 0.4% drop in December 2011collections. The
second exception was a 35% month over month decrease in September 2012,
attributable to a sizable litigation settlement between the county and
Expedia.com. Adjusting for the settlement payments, September 2012 TDT revenues
expanded by a healthy 5.1% over prior year revenues. For the entire fiscal 2012,
TDT revenues gained 4.2% net of the Expedia settlement and have grown a
substantial 19% since fiscal 2009.
The ongoing recovery has been boosted by a combination of pent-up theme park
demand according to officials, an improving economy, an influx of foreign
visitors and a Harry Potter attraction at the Universal Theme Park which opened
in 2010. Both Disney World and Universal are in the process of making sizable
investments in their Orlando theme parks. Disney is expanding Fantasyland while
Universal is in the process of developing a 1,800 room hotel on-site. New
features at existing theme parks, such as the planned Antarctica ride at
SeaWorld, are expected to further boost visitors.
TDT revenues experienced robust growth, increasing at an average annual rate of
12.7% from 1979 to 2000. During the past decade, however, the TDT suffered its
first-time annual drop falling 3.1% in fiscal 2001. The TDT fell an additional
12.6% in fiscal 2002 and 15.4% in fiscal 2009. The recent volatility of the
revenue stream underscores the economically sensitive nature of the TDT and its
dependence upon the local tourist sector.
Some revenue stability is provided by an annual installment payment equal to
$2.8 million to be received monthly through Nov. 15, 2018. In bond year 2011 -
2012, the installment payments equalled 16% of pledged revenues.
THIN COVERAGE RATIOS, CUSHIONS FROM RESERVES
Despite the recovery in TDT collections, coverage of series 2008A and 2008B debt
service remains thin. The bonds were structured with the larger principal and
interest payments payable on Nov. 1 as revenue collections have historically
been more robust during the summer months. The flow of funds is unusual as the
first interest payment in each bond year is paid across all series while for the
second principal and interest payment, senior debt service is paid prior to the
second and third liens. As a consequence, debt service requirements are
substantially higher for November payment dates. Both on a historical and
projected basis, coverage has been narrower for the November dates, and Fitch
rates to these lower ratios.
TDT revenues collected from March through August of 2012 provided a slim 1.25x
debt service coverage for the series 2008A November, 2012 payment. Payment of
all series 2008A bonds without a draw on the reserve funds requires modest TDT
growth over the life of the issue. Under the Fitch base case scenario of 2.3%
annual growth, equal to the average annual growth since fiscal 2000, TDT
revenues would provide debt service coverage of at least 1.2x. Fitch stress
scenarios that mirror the severe historical revenue declines of the past decade,
followed by a conservative recovery and then baseline growth, demonstrate that
reserves would be required to augment pledged revenues.
For combined series 2008A and subordinate series 2008B debt service, TDT
revenues failed to provide sum-sufficient coverage for the November 2010
payment, with actual coverage at 0.97x. TDT revenue growth over the past two
years resulted in a still slim 1.13x coverage in November 2012. Under the Fitch
base case scenario, TDT coverage would range from 1.0x - 1.2x through November
2020. Fitch stress scenarios described above as well as a no growth scenario
would result in a default of the series B bonds.
The liquidity reserves for each series were established to compensate for
expected fluctuations in TDT collections. Use of the liquidity reserve does not
constitute a material event, and use of the DSRA does not constitute a default.
The series 2008A liquidity reserve has been fully funded since the middle of
2009 when it was replenished subsequent to a draw to compensate for lower than
anticipated capitalized interest earnings. The series 2008B liquidity reserve
was replenished in July 2011 with the payment of $392,000 of unused
construction. THE DSRA has never been utilized for either series of bonds.
ADEQUATE BONDHOLDER PROJECTIONS
Legal provisions include a cross-default provision, which stipulates that the
default of one series of bonds under the indenture is an event of default under
all indentures. Upon default, the flow of funds directs payment of principal and
interest to the holders of the series 2008A bonds and subsequently to the owners
of the 2008B bonds, prior to any payments to third lien bondholders. It is
likely that a cross-default will occur during the life of the bonds, given that
the series 2008C defaults in the Fitch base case scenario and in all of the
stress tests. Average annual revenue growth of 11.1% is required to generate
sufficient income to avoid default on the series 2008C through 2020. Fitch
considers this to be optimistic, given the recent trend of TDT volatility.
Additional debt is prohibited under the indenture, except for refundings.
Additional bonds for refunding purposes may be issued if, during any consecutive
12 of the previous 25 months, contract revenues equaled at least 1.33x MADS on
all existing and proposed debt and 1.10x MADS on all senior and second-lien
bonds. The calculation excludes installment payment revenues.
CENTRAL FLORIDA ECONOMIC STRENGTHS
The local economy is experiencing a sustained recovery as evidenced by solid job
growth and falling unemployment rates. Employment levels within the Orlando
metropolitan statistical area (MSA) increased by 1.7% in 2011 after three
consecutive years of job losses. MSA employment for August 2012 shows a year
over year increase of 3.7% or approximately 37,000 jobs. Consequently,
unemployment rates have dipped from over 10% during 2011 to 8.7% as of this past
August, below the state rate of 9.0% but above the national unemployment rate of
The leisure and hospitality sector is a major component of the local economy,
comprising about 21% of total employment. Disney is the dominant player,
employing about 58,000 or over 10% and 5% of county and MSA employment,
respectively. Universal reports 13,000 employees while SeaWorld of Orlando's
workforce totals approximately 7,000. Beside growing TDT collections, consistent
expansion in leisure and hospitality employment and generally higher occupancy
and hotel room rates reflect the growing strength of this sector.
Economic diversification continues to take hold, most notably within the
education and health services sectors. A growing biotechnology and life sciences
cluster is anchored by The University of Central Florida's (UCF) Health Sciences
Campus, which is home to its College of Medicine and the Burnett College of
Biomedical Sciences, in addition to M.D. Anderson Cancer Center and
Sanford-Burnham Medical Research Institute. In addition, Nemours Children's
Hospital recently opened and completion of a new Veteran's Administration
hospital is projected for mid to late 2013. Arduin, Laffer & Moore Econometrics
estimated the creation of 30,000 jobs and $7.6 billion in economic impact over
10 years as a result of the UCF activity and related life sciences development.
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