Fitch Rates Cape Coral, FL's Water & Sewer Rev BANs 'F2'; Affirms Outstanding Debt

NEW YORK--(Business Wire)--
Fitch Ratings has assigned an 'F2' rating to the city of Cape Coral, FL's $85
million of water and sewer revenue bond anticipation notes (BANs), series 2009.
The BANs are scheduled for negotiated sale on July 14, 2009 with proceeds being
used to refinance outstanding commercial paper previously issued to finance
ongoing capital projects of the city's utility system (the system). At this
time, Fitch also affirms the 'A-' rating on the city's approximately $204
million of outstanding water and sewer revenue bonds as well as the 'BBB' rating
on each of the following series of bonds:

--$33.2 million wastewater and irrigation water refunding assessment bonds;

--$25.4 million utility improvement assessment bonds, series 2005 (Southwest 2);

--$26.5 million utility improvement assessment bonds, series 2006 (Southeast 1);

--$62.6 million utility improvement assessment bonds, series 2007 (Southwest 4);

--$57.8 million utility improvement assessment bonds, series 2007 (Southwest 5
and Surfside).

The city's water and sewer revenue bonds, including the BANs, are secured by a
senior lien on net revenues of the city's utility system, while utility
improvement special assessment bonds are secured by assessments levied on
residential and commercial properties that benefit from utility expansion
projects. The Rating Outlook on all bonds remains Negative.

The 'F2' short-term rating assigned to the BANs incorporates the size of the
current issuance, which accounts for a notable 15% of total utility debt
currently outstanding, as well as heightened financial market uncertainty
associated with refinancing risk, particularly for lower rated issuers.
Additional concern factored into the short-term rating stems from the utility
system's lack of sufficient liquidity to guard against the potential inability
to refinance or extend out the proposed BANs.

The 'A-' rating on the city's water and sewer revenue bonds reflects a material
decline in the system's financial position and debt profile over the past two
years marked by a precipitous drop in debt service coverage and liquidity,
significant growth in debt levels, and an almost doubling of rates, which were
already above average relative to resident income levels. Maintenance of the
Negative Outlook reflects Fitch's concern that the forecasted rate increases may
not be sufficient to restore liquidity and provide an adequate cushion to guard
against unforeseen operating challenges in a service area marked by a very high
number of residential home foreclosures.

The 'BBB' rating on the utility improvement assessment bonds incorporates the
risk that the high rate of home foreclosures occurring throughout the city,
including in the special assessment areas, may impede the city's ability to
collect all assessments in a timely manner. Fitch recognizes that collection of
special assessments have been on target to date and that nonpayment results in a
timely tax certificate sale process with a parity lien with ad valorem taxes.
However, the narrow debt service coverage provided by special assessments yields
almost no margin in the event tax certificates are not fully sold. In addition,
the added protection provided by a backup covenant to pay debt service from net
revenues of the utility system in the event that assessments are insufficient is
now lessened by the system's severely limited ability to provide such support if
called upon. Maintenance of the Negative Outlook reflects the instability of the
city's economy and housing market.

The city's water and sewer system serves approximately 57,000 accounts located
entirely within city limits. Water supply is drawn from the Lower Hawthorne
Aquifer and is sufficient for the foreseeable future, and the continuation of
expansion projects at the system's treatment facilities will ensure adequate
capacity. Following a sustained period of rapid customer growth that averaged
about 8% annually, the number of new customers connecting to the system dropped
substantially over the last two years. A significant amount of debt was issued
over the years to support both realized and future increases in customers,
although the dramatic slowing in growth in recent years has left revenue growth
insufficient to comfortably meet a rapidly rising debt burden. As a result,
annual debt service coverage on revenue bonds and state revolving fund loans
experienced a notable drop between fiscal years 2006 and 2008, declining from a
peak of 3.2 times (x) to 1.3x. The deterioration in debt service coverage
occurred despite sizeable annual rate increases that averaged about 10% between
2005 and 2008. In addition, weak operating results and the use of reserves for
capital projects in anticipation of future borrowing significantly reduced the
system's liquidity position. The system ended fiscal 2008 with approximately
$3.1 million in unrestricted cash, equal to a very low 32 days of cash on hand
for operations.

To boost operating margins, increase debt service coverage and restore the
system's cash position, a series of large annual rate increases totaling 79%
over five years were adopted in April 2009. With the current average monthly
residential bill equal to nearly 2% of the city's median household income, rates
are already on the higher end of what Fitch considers to be affordable and will
continue to pressure ratepayers. Favorably, the reduced pace of customer growth
has resulted in a smaller, more manageable multi-year capital improvement plan
(CIP) of about $115 million through 2014 compared to the $564 million 2006-2010
CIP. Nonetheless, Fitch believes the system is highly leveraged, as the amount
of currently outstanding debt is equal to slightly more than $3,500 per customer
and equals 65% of system assets.

Fitch's rating definitions and the terms of use of such ratings are available on
the agency's public site, 'www.fitchratings.com'. Published ratings, criteria
and methodologies are available from this site, at all times. Fitch's code of
conduct, confidentiality, conflicts of interest, affiliate firewall, compliance
and other relevant policies and procedures are also available from the 'Code of
Conduct' section of this site.

Fitch Ratings
Christopher Hessenthaler, 212-908-0773 (New York)
Kelly McGary, 813-223-6600 (Tampa)
Media Relations:
Cindy Stoller, 212-908-0526 (New York)
cindy.stoller@fitchratings.com

Copyright Business Wire 2009