Fitch Affirms Bexar County, TX Venue Tax Bonds at 'A+'; Outlook Stable
Fitch Ratings affirms its 'A+' rating on the following Bexar County, TX bonds:
--$60.3 million venue project revenue bonds (motor vehicle rental tax);
--$154.3 million venue project revenue bonds (combined venue tax).
The Rating Outlook is Stable.
Motor vehicle rental tax bonds are payable from a first lien on motor vehicle rental taxes (MVRT). Combined venue tax bonds are payable from a first lien on hotel occupancy taxes (HOT) and a junior lien on MVRT.
KEY RATING DRIVERS
LARGE, MATURE HOSPITALITY SECTOR: Pledged revenues benefit from the county's position as the top tourist destination in Texas. MVRTs and HOTs are subject to economic volatility but benefit from the county's large convention and visitor industry which markets to both regional and national audiences.
LOW COVERAGE; LARGE RESERVE: The county's planned take out of short-term bonds will reduce annual debt service coverage (DSC) for the combined venue tax bonds to very thin levels. DSC for the MVRT bonds is projected to remain sound. Offsetting concerns about coverage, accumulated venue taxes in the capital improvement and coverage fund (CICF) are restricted for debt service, capital improvements, or bond redemption. The current balance in the CICF is sizeable and the county has no plans to use the fund.
WEAK ABT: For both securities, in order to issue additional parity bonds, pledged revenues must be at least equal to 1.25 times (x) average annual debt service, which Fitch considers to be below average.
FLEXIBLE CAPITAL PLAN: In response to pledged revenue declines in 2009, the county issued property tax secured bonds for the largest venue tax project, providing capacity to fund remaining projects under more conservative pledged revenue growth assumptions. The large majority of venue tax projects have been funded and the remaining capital plan is flexible and can proceed in phases if necessary.
NO OPERATING EXPOSURE: The county will not be responsible for the sizeable operations and maintenance costs of the numerous bond-financed projects due to negotiated memorandums of understanding with non-profit organizations.
HIGH COMMUNITY SUPPORT: The county voters' support for the venue tax extensions was notable for its high approval margin.
WHAT COULD TRIGGER A RATING ACTION
DEPLETION OF CAPITAL IMPROVEMENT AND COVERAGE FUND: The use of the CICF reserves for any purposes other than bond redemption would remove a significant offsetting credit strength and could lead to a negative rating action.
Voter Approved Venue Taxes
In May 2008, county voters approved the extension of the existing 1.75% HOT and 5% MVRT, originally approved in 1999 to finance the construction of the AT&T Center, home of the NBA Spurs. The extended venue taxes, which are not capped or restricted for specific amateur sports or tourism projects, will finance $415 million in new tourism projects, including San Antonio River projects ($125 million), amateur sports projects ($80 million), rodeo and arena enhancements ($100 million), and cultural arts projects ($110 million).
Large Hospitality Sector Benefits Pledged Revenue Base
Pledged revenues are supported by presence of five of the state's top 10 tourist attractions, including the Alamo, the San Antonio Riverwalk, Sea World, Six Flags over Texas, and the San Antonio Zoo. After strong growth through fiscal 2008, HOT and MVRT revenues declined by 15.5% and 6.4%, respectively, in fiscal 2009, before rebounding by over 5% in fiscal years 2010-2011. Year to date MVRT and HOT receipts (for the first 11 months of fiscal 2012) continue on a positive trajectory, increasing by 8.2% and 6.8%, respectively.
The inventory of hotel rooms grew by a notable 26% from 2007-2011 and additional hotels are under construction (although the county's conservative forecast assumes flat pledged revenue growth which Fitch views favorably).
Planned Issuance To Reduce Coverage
By the end of 2012, the county is planning to issue additional bonds to refund short-term subordinate lien bonds recently issued by the county. The proposed refunding includes $28 million in MVRT-secured bonds and $101 million in combined venue tax bonds. Post-refunding, over 82% of the planned venue tax CIP will have been funded, leaving $75 million in remaining bond authorization, all of which will be secured by the combined venue tax pledge.
Including the proposed take-out of short-term bonds, annual debt service (ADS) coverage declines to a minimum of 1.4x for the MVRT bonds based on projected fiscal 2012 revenues. ADS coverage of the combined venue tax bonds declines to a notably thin 1.15x by 2014. The county's 1.25x additional bonds test, which Fitch considers below average, is based on average ADS and is met successfully due to growing year to date receipts for the first 11 months of fiscal 2012 (equal to a combined 7.3% gain over the same period last year).
Large Reserves Buffer Thin Coverage
The CICF totaled $62.5 million at the beginning of fiscal 2012, equal to over four years of debt service payments. The CICF can only be used for debt service, capital improvements, and bond redemption, which Fitch's considers a key offsetting credit strength to thin coverage levels of the combined venue tax bonds. The CICF reserves are especially important under Fitch's stress scenarios in which revenues experience declines equal to those posted during the 2009 recession. Additionally, the maintenance of large CICF reserves will remain paramount given the county's plan to issue $75 million in remaining combined venue tax bonds by 2016.
Flexible Capital Plan
The decline in pledged revenues in fiscal 2009 led the county to issued flood control tax certificates of obligation (COs) for the largest venue tax projects, San Antonio River improvements totaling $125 million. The shift to the flood control tax levy reduced venue tax projects by a notable 25%, allowing the county to issue venue tax bonds for other projects.
No Operating Impact To County
Fitch also notes that the county will not be responsible for the sizeable operations and maintenance (O&M) costs of the numerous bond-financed projects. O&M costs have been addressed through negotiated memorandums of understanding with non-profit organizations which Fitch views positively.
Broad And Expansive Economy
Bexar County, with an estimated 2012 population of 1.8 million, is home to San Antonio. The local economy is broad, consisting primarily of military and government employment, domestic and international trade, convention and tourism, medical and healthcare, financial services, and telecommunications.
Income levels are generally about 10% lower than the U.S. average but only slightly less than state average. However, growth in area income over the past few years has exceeded state and national norms, although the current economic slowdown has slowed this trend. Several major commercial and military projects have helped stabilize or restore economic growth, including the $3.2 billion San Antonio Military Medical Center, which was accompanied by approximately 12,500 additional military personnel to the county.
Aided by considerable growth in the energy sector, the county's unemployment rate, which totaled 7.4% in July 2012, has declined notably from 12 months prior (8.2%) and remains on par with the state average but well below the national average.
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 informed by information from CreditScope, University Financial Associates, S&P/Case Shiller Home Price Index, HIS Global Insight, Zillow.com, and National Association of Realtors.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria', dated Aug. 14, 2012;
--'U.S. Local Government Tax-Supported Rating Criteria', dated Aug. 14, 2012.
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria
Jose Acosta, +1-512-215-3726
111 Congress Avenue, Suite 2010
Austin, TX 78701
Gabriela Gutierrez, +1-512-215-3731
Karen Ribble, +1-415-732-5612
Elizabeth Fogerty, +1-212-908-0526