September 6, 2012 / 2:10 PM / in 6 years

TEXT-Fitch rates Gravois Bluffs Transportation Dev District, Mo.

Sept 6 - Fitch Ratings has affirmed the following Gravois Bluffs Transportation Development District (Fenton, MO) bonds at ‘BBB’: —$17.69 million transportation sales tax revenue bonds, series 2007. The Rating Outlook is Stable. SECURITY The bonds are limited obligations payable solely from the net revenues of a 1% tax on retail sales collected within the district. However, 50% of the collected revenues are allocated to the Fenton Gravois Bluff tax increment finance district (TIF district) until the earlier of 1) no TIF debt is outstanding or 2) the expiration of the TIF district in October 2021. The pledge of the sales tax is subject to annual appropriation by the district. The bonds are also secured by a cash-funded debt service reserve totaling $2.049 million. KEY RATING DRIVERS RISK OF NON-APPROPRIATION IS MINIMAL: The sales tax revenues securing the bonds are subject to annual appropriation by the district; however, there is little incentive not to appropriate as the revenues remain stranded if not appropriated. DISTRICT LIMITED IN SCOPE AND SIZE: The district consists of 80 stores encompassing an extremely small 275 acres. There is point-of-sale concentration with the top 10 sales tax payers accounting for 73% of total 2011 sales tax revenues. PARITY OR SUBORDINATED DEBT RISK: The bonds benefit from a turbo feature, which current projections show will allow for total retirement five years in advance of final maturity. Issuance of parity or junior lien debt, while not currently anticipated, would alter those projections and could materially affect bond repayment time. CREDIT PROFILE CONCENTRATED, LIMITED PURPOSE DISTRICT The district encompasses a 0.43 square mile area advantageously located proximate to the intersection of highway 141 and highway 30 roughly 20 miles southwest of downtown St. Louis. The district board of directors consists of five members, all of whom are associated with the developer, and two advisory members, the city of Fenton finance director, and a MO DOT representative. The district serves as one retail corridor of the city of Fenton, which is an affluent community with per capita income levels at 129% of the state average. The district is likely drawing customers from greater than just the city limits; however, conversely city residents are not shopping solely within the district. Currently there are 126 occupied retail establishments located within the district, consisting of several anchor stores including Lowe’s, Wal-Mart, Kohl’s, Sears and Target and supplemented by numerous small generic businesses. The St. Louis metropolitan region is saturated with identical and similar store competitors thus there is no inherent competitive advantage. There is point-of-sale concentration with the top 10 sales tax payers accounting for 73% of total fiscal 2011 sales tax revenues, heavily weighted towards the top five payers. There is non-impairment language whereby the district cannot repeal or amend its tax rate if such action would impair the district’s ability to repay the bonds. DEBT STRUCTURE PROVIDES FLEXIBILITY The bonds are structured with a 2032 bullet maturity with a special mandatory redemption feature whereby all excess revenues must redeem the bullet maturity. This structure provides payment flexibility for the district as the bonds are secured by historically volatile sales tax revenues. The district projects that the 2032 maturity will be fully retired by 2023, assuming the district receives 100% of the sales tax revenues beginning 2017 (following estimated retirement of TIF bonds in 2016). Fitch stress tests show this projection to be reasonable, assuming no growth in sales tax revenues from 2011 levels. Severe stress tests that include one year of 20% declines followed by two years of 10% declines and maintenance of that level thereafter still show the bonds can be retired by 2027, well in advance of the 2032 maturity. However, given the extremely small geographic area, point-of-sale concentration, incongruent lease terms of tenants to the final maturity of the bonds and the presence of abundant local competitors, there is significant risk of future sales tax revenues declining materially and permanently. ADDITIONAL AND SUBORDINATED DEBT RISK The additional bonds test is liberal at either 1) historical net pledged sales tax revenues at least 1.4x pro forma debt service in that year or 2) historical net pledged sales tax revenues at least 1.4x pro forma debt service in that year and projected pledged sales tax revenues for each year at least 1.4x pro forma debt service for each year. Fitch stress tests project that leveraging up to the ABT would not endanger timely bond repayment by final maturity but would materially extend the timeframe beyond what is currently expected. Furthermore, the district may issue subordinate debt without restriction. As a potential risk, the junior bonds could effectively become senior-in-time to the outstanding 2032 bullet maturity. Excess funds that would otherwise be used to trim the size of the senior bullet payments (and thus make final bullet payment manageable) would be funneled off to pay junior debt service. However, the risk is limited by the district’s narrow scope and lack of further infrastructure needs.

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