Fitch Downgrades Park Creek Metro District, CO's Limited-Tax Bonds to 'BBB' from 'BBB+'

AUSTIN, Texas--(BUSINESS WIRE)--

Fitch takes the following rating action on Park Creek Metropolitan District, Colorado's (PCMD or the district) outstanding bonds:

--$192.38 million outstanding senior limited property tax supported revenue bonds downgraded to 'BBB' from 'BBB+'.

The Rating Outlook is Stable.

SECURITY:

The bonds are special obligations of the district payable from a senior lien on certain payments received pursuant to an interlocal agreement derived from the levy of a limited ad valorem tax within the Westerly Creek Metropolitan District (WCMD).

KEY RATING DRIVERS:

DEBT SERVICE COVERAGE DECLINE: Recent assessed value (AV) declines and construction delays have reduced coverage of maximum annual debt service (MADS) to a slim 1.11 times (x) from projected fiscal 2013 pledged revenue.

HIGH DEBT BURDEN: Debt ratios are very high due to significant subordinate obligations (not rated by Fitch) and payout is slow - a profile not uncommon among metro districts.

PROPERTY TAX AT MAXIMUM RATE: Future revenue growth will be dictated by new construction and trends in property valuation as WCMD's current tax rate is set at the maximum allowable rate.

STRATEGIC LOCATION: The service area, Stapleton, is strategically located between downtown Denver and Denver International Airport. The diversity of development is another credit positive, with large retail and industrial sectors supplementing residential development.

ADVANCED URBAN DEVELOPMENT: The service area has attained an advanced level of development and only a moderate amount of infrastructure costs remains for the short-to-medium term.

PROMISING GROWTH PROSPECTS: Stapleton represents the city's only remaining large tract of developable land that includes a residential component. Residential units under construction increased considerably in 2011 following several years of slowed development.

WHAT COULD TRIGGER A RATING ACTION

SLOWED DEVELOPMENT; REAPPRAISAL LOSSES: District AV forecasts for fiscal 2013 and 2014, based largely on completed development and construction underway, are important to rating stability given already diminished coverage levels.

CREDIT SUMMARY:

LARGE AND DIVERSE DENVER-METRO DEVELOPMENT AREA

PCMD was created for the purpose of assisting in the financing and construction of infrastructure improvements serving a portion of the former Stapleton International Airport. WCMD was created simultaneously with the district to provide property tax and other revenue to the district, pursuant to interlocal agreement, in exchange for the completion of infrastructure improvements by the district.

The service area of the district and WCMD is ideally located in close proximity to downtown Denver, major transportation corridors, and Denver International Airport. The development plan creates a mixed-use community that at full build-out is projected to include 12,000 housing units, 13 million square feet of commercial and retail space, and 1,100 acres of open space and parks on about 4,000 total acres.

Development on the first 1,566 of 2,935 projected developable acres is now in its fourth phase, with 62% of the planned 7,361 residential units completed and occupied. A regional shopping center and other retail are also in place, with industrial space built and occupied as well. Office construction is the district's most challenging sector, with the first major building completed in 2010.

The existing housing stock is diverse with home prices ranging from $150,000 to $1 million, which should prove advantageous in a better economic climate. The median home value is over $400,000, reflecting the affluent nature of residents, and management reports minimal residential foreclosure activity in the service area.

AV is concentrated although trending down favorably, with the top 10 taxpayers accounting for 33% of total values, down from 44% in 2010. These properties represent a mix of commercial and industrial properties.

SIGNIFICANT INFRASTRUCTURE INVESTMENT

Over $500 million in infrastructure has been put in place to date comprising the bulk of such needs for full development, funded largely by tax increment finance (TIF) bonds of the Denver Urban Renewal Authority, which Fitch rates 'BBB+', and excess TIF revenues.

Fitch views the district's additional bonds test as adequate; recently changed from a prospective test, it now requires the 1.25x coverage test be met using historical AV for the past two years.

No new money debt is anticipated, but the district's practice of refunding outstanding subordinate-lien debt with senior lien bonds may limit prospects for coverage growth over the long-term.

ASSESSED VALUE DECLINES WEAKEN COVERAGE

The AV of WCMD, PCMD's taxing district, increased at an impressive compound annual growth rate (CAGR) of 30% from fiscal 2005-2011. Growth was much more moderate in fiscal 2009 and 2010 due to a steep building slowdown and declined by 8.2% for fiscal 2012.

Due to the decline in AV for fiscal 2012, coverage for senior lien bonds' annual debt service dropped to 1.20x from 1.46x in fiscal 2011. Similarly, MADS coverage using fiscal 2012 pledged revenue dropped to a very thin 1.06x from 1.15x in fiscal 2011.

TAX BASE GROWTH PROJECTIONS SUPPORTED BY DEVELOPMENT ACTIVITY

MADS coverage improves to 1.11x in fiscal 2013 based on the district's projection for tax base additions from completed new construction.

The district projects 12.2% AV growth for fiscal 2014 almost entirely related to new construction underway and expected to be complete before the close of the current calendar year. Under this scenario, which Fitch believes contains some downside risk, MADS coverage would be 1.24x.

The district expects similar strong growth for fiscal 2015 and 2016. Fitch notes the pipeline of residential construction within the service area improved significantly in 2011 with 371 units reported under construction as of the 4th quarter of 2011 compared to 32 units the year prior.

FITCH STRESS ANALYSIS

Fitch's stress tests show senior lien coverage remaining thin but above 1.0x assuming sharply reduced AV and development activity. Fitch also notes that under most stress tests, PCMD's fourth and most junior lien will continue to rely on developer advances.

In the event of default on any subordinate bonds, there is no acceleration of senior debt or other adverse effects to senior bondholders.

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, Case-Shiller Quarterly Index, and IHS Global Insight.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 15, 2011);

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 15, 2011).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648898

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648842

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