Fitch Affirms Detroit Downtown Development Authority, MI Tax Increment Bonds; Outlook to Stable
Fitch Ratings has affirmed the ratings on the following bonds issued by the Detroit Downtown Development Authority, MI (DDA or district):
--Tax increment refunding bonds (Development Area No. 1 projects), series 1998A affirmed at 'BBB-';
--Tax increment bonds (Development Area No. 1 projects), series 1998B (taxable) affirmed at 'BBB-';
--Tax increment bonds (Development Area No. 1 projects), series 1998C (junior lien) affirmed at 'BB+'.
The Rating Outlook on all bonds is revised to Stable from Negative.
Bonds are secured by a pledge of all tax increment revenues captured by Development Area No. 1.
KEY RATING DRIVERS
OUTLOOK CONSIDERATIONS: Pledged tax increment revenue has dropped in recent years but is projected to remain sufficient, despite appeal-related AV declines. Appeal rebates may cause coverage to dip temporarily in 2012 and/or 2013, but over the longer term, Fitch expects senior lien coverage to remain at or near 1.4 times (x) and junior lien coverage to remain at or near 1.2x until the junior lien debt matures in 2018.
WEAK COVERAGE, PARTICULARLY FOR SUB LIEN: Fitch expects very narrow coverage for subordinate lien bonds but at least somewhat better protection for senior lien bondholders.
UNCERTAINTY OF APPEAL SETTLEMENT: An appeal related to the district's largest taxpayer - General Motors Co. (GM) - has been settled. The settlement involves both a reduction of the property's value and a refund of taxes previously paid. The timing of the refund by the DDA and the impact of the reduction on future pledged tax increment revenue remains unclear although the county estimates $0.5 to $0.6 million, but a significant effect on 2012 and/or 2013 revenues is likely.
HIGH TAXPAYER CONCENTRATION: The largest taxpayer represents 22% of taxable value (TV) prior to the appeal settlement, and the top 10, representing 51%, are largely related to the automobile industry.
IMPORTANT COMMERCIAL HUB: The district encompasses the core of downtown Detroit, including many key commercial assets.
IMPROVED AUTO MANUFACTURING PROSPECTS: The health of the U.S. automobile industry is improving, as evidenced by Fitch's recent upgrades of the Issuer Default Ratings of both GM and Ford Motor Co. (Ford).
WHAT COULD TRIGGER A RATING ACTION
OVERALL TAX BASE EROSION: Fitch expects flat to slowly declining TV going forward after incorporating the impact of the GM appeal settlement. More than a modest annual decline could result in a lower rating.
The DDA was formed in 1976 to promote economic development in downtown Detroit. Development Area No. 1 is comprised of 615 acres, roughly coterminous with the downtown business district and represents about 7% of the city's TV. In addition to the GM-owned Renaissance Center, the district includes one of the city's three casinos, stadiums for the Detroit Lions and Detroit Tigers, and development along the city's waterfront. The captured value (incremental TV above the base) is moderate at 250% of total TV.
IMPACT OF GM APPEAL ON PLEDGED REVENUE
The recent settlement of an appeal by GM, whose headquarters at the Renaissance Center is the largest contributor to TV, will resolve some uncertainty about the direction of the tax base and pledged revenue. The settlement reduces GM's tax payments over the past three years and the TV from which future tax payments are derived. The 2011 taxable valuation, the last to be adjusted, declined 23% from the pre-appeal level. Prior year adjustments were more moderate.
TAX BASE CONCENTRATION AND WEAK ECONOMIC ENVIRONMENT
The rating also reflects the project area's high tax base concentration, with the 10 largest taxpayers making up 32% of captured value. In addition to GM at 22%, several taxpayers are office buildings that rely for occupancy to some extent on the auto industry. Prospects for the industry have improved. Fitch recently upgraded both GM (to 'BB+', Outlook Stable from 'BB', Outlook Positive) and Ford (to 'BB-', Outlook Stable from 'BB+', Outlook Positive).
The city's economic indicators continue to be exceptionally weak despite apparent auto industry improvement, including an unemployment rate of 19.6% in August 2012, down from 20.8% in August 2011. Both the labor force and employment declined, although the number of jobs in the metropolitan area increased slightly. City income and poverty figures are quite weak. The 2010 census showed a surprisingly large drop in population to 713,777, a 25% decline from the 2000 census.
DECLINING PLEDGED REVENUES
Coverage from pledged revenue has been declining, consistent with Fitch's expectations. Coverage of maximum annual debt service is expected to drop to 1.29x for combined senior and subordinate debt in fiscal 2012 from 1.48x in fiscal 2009. Fiscal 2012 coverage of senior lien bonds alone is expected to be slightly stronger at 1.42x.
Fitch is concerned about the future direction of pledged revenue given the decline in coverage and the uncertain impact of the GM appeal settlement. Fitch's estimate of fiscal 2013 combined coverage is just 1.12x (assuming full repayment of GM's refund) and 1.23x in fiscal 2014 assuming no other captured value or tax increment revenue changes. The bonds' standard debt service reserve accounts are cash-funded, providing some protection on a shorter-term basis. Subordinate bonds mature in fiscal 2018, leaving somewhat improved coverage thereafter until senior lien bonds mature in fiscal 2028.
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, Underwriter, Bond Counsel, and Financial Advisor.
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:
U.S. Local Government Tax-Supported Rating Criteria
Tax-Supported Rating Criteria
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