Market Overview

Fitch Rates $282MM Orange County, FL's TDT Revs 'AA'; Outlook Stable

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NEW YORK--(BUSINESS WIRE)--

Fitch Ratings has assigned a 'AA' rating to the following Orange County, FL bonds:

--$84.165 million tourist development tax (TDT) revenue bonds, series 2016A; and

--$198.04 million TDT revenue refunding bonds, series 2016B.

Fitch also has affirmed the following ratings:

--About $626 million outstanding TDT revenue bonds at 'AA'.

The Rating Outlook is Stable.

The bonds are scheduled for competitive sale on Nov. 29. Proceeds of the series 2016A bonds will be used to pay the cost of a new music hall at the Performing Arts Center while proceeds of the series 2016B refunding bonds will advance refund all of the outstanding $235 million of City of Orlando contract TDT payments revenue bonds, series 2014A.

SECURITY

The TDT revenue bonds are limited obligations of the county payable from pledged 5% TDT collections net of costs for operating, maintenance and promotion of the county's convention center. The pledged TDT support for operating costs is capped at the greater of $0.4 million or 1.74% of the prior year's TDT collections. Additionally pledged are net convention center operating revenues, naming rights revenues, and investment earnings, which have historically been insignificant.

KEY RATING DRIVERS

AMPLE COVERAGE RESILIENCE: The 'AA' rating on the TDT bonds incorporates the high level of pro forma debt service coverage (about 2.3x), the expectation that coverage levels will remain elevated given strong growth prospects, and substantial reserves which could be used to cover any TDT shortfalls. The bonds exhibit a large measure of resilience to a moderate economic downturn.

MODERATE LEVERAGE RISK: While the additional bonds test (ABT) allows issuance up to 1.33x maximum annual debt service (MADS), the issuer does not intend to leverage the pledged TDT revenue stream down to the ABT. A large decline in debt service in fiscal 2025 and rapid amortization of existing debt strengthen the bonds' overall flexibility. Fitch believes the TDT can withstand significant additional leverage and still provide adequate coverage consistent with the current rating.

RATING NOT CAPPED BY ISSUER DEFAULT RATING (IDR): The bonds are backed by a lien on revenues that meet the definition of 'special revenue' within Section 902(2)(B) of Chapter 9 of the Bankruptcy Code. Fitch believes a lien on special revenues would be preserved in the event of a municipal bankruptcy filing and be exempt from the automatic stay provisions of the Code. Therefore, the TDT bond rating would not be capped by the county's IDR ('AAA').

Economic Resource Base

The growing health and education sector, underpinned by high-wage medical research and biotechnology, has broadened an economy that was traditionally based in tourism. Fitch expects the above-average growth rate of area employment to lift county income indicators, which are currently below national levels.

RATING SENSITIVITIES

UNEXPECTEDLY STEEP DECLINES IN REVENUES: Declines in pledged revenues that materially reduce Fitch's expectations for debt service coverage throughout the economic cycle could lead to negative rating action on the bonds.

LIMITED LEVERAGE: The rating assumes limited additional leverage of pledged revenues. Borrowing outside of this expectation could pressure the rating.

CREDIT PROFILE

The county's economy anchors the central portion of the state. Professional and business services, education, health care, and biotechnology augment the historically strong tourism sector. The Medical City at Lake Nona embodies the recent growth in the biomedical field, and recent opening of facilities for a medical innovation center at Lake Nona are intended to serve as a breeding ground for new ideas in the biosciences.

Tourism remains a considerable economic force. Walt Disney World (Disney) is the county's largest taxpayer at 8% of taxable assessed value and the largest employer (about 70,000 employees). (Fitch's long-term IDR on The Walt Disney Company is 'A'.) In 2015, the county received a record 66 million visitors. New investments by Disney and Universal Studios in their Florida theme parks such as the Star Wars themed land at Disney World and a new hotel and water park at Universal are expected to maintain strong visitor counts.

County population growth has well exceeded state and national population gains. Substantial residential development is expected to accommodate a further influx of new residents over the near term. Job growth which has outpaced both state and national trends and continued economic diversification, particularly within biotechnology and medical research, could provide a boost to area incomes that are slightly below the state and national benchmarks.

BONDS REFUND ORLANDO DEBT

The bulk of the financing will be used to refund Orlando's contract TDT payments revenue bonds, series 2014A (rated 'AA+' with a Stable Outlook). The series 2014A bonds were ultimately backed by a covenant to budget and appropriate pledge of the city. Under an inter-local agreement, the county pledged to send proceeds of the first five cents of TDT collections above a certain base year target to the city to support debt service on the series 2014A bonds. By refunding the series 2014A bonds and folding the financing into its existing TDT bond structure, the county enhances flexibility and frees up significant reserves.

CONSISTENT TDT GROWTH

Since it was first levied in 1979, the TDT has only declined in four years although a small drop in fiscal 2012 was entirely attributable to a one-time settlement payment the year before. TDT collections have rebounded strongly after each period of decline. Excluding the fiscal 2011 settlement payment, the TDT is in its seventh consecutive year of growth. Eleven month year-to-date collections for fiscal 2016 are up 5.9% from the same period in fiscal 2015.

SOLID GROWTH PROSPECTS

Solid growth prospects for the central Florida economy and continued large investments by Disney and Universal in their world-renowned theme parks are expected to bolster TDT collections in the future. New exhibits at Disney including the Star Wars theme land and the King Kong ride and a new hotel and water park at Universal should boost attendance at both parks, one of the chief drivers of TDT growth.

SENSITIVITY TO ECONOMIC DOWNTURNS

To evaluate the sensitivity of the TDT to cyclical decline, Fitch utilizes its Fitch Analytical Sensitivity Tool (FAST) to consider both modeled revenue sensitivity results (using a 1% decline in national GDP scenario) and the largest decline in revenues over the period covered by the revenue sensitivity analysis. Based on a 15-year pledged revenue history FAST generates a 7% scenario decline in pledged revenues, and the largest actual cumulative decline in historical revenues is a 15.7% decline in fiscal year 2009.

FAST results show that pledged TDT revenues could withstand about 8.2x the scenario decline and 3.6x the largest historical TDT decline before pledged revenues became insufficient to cover MADS. This is consistent with a 'aaa' resilience assessment. If the same scenarios were measured assuming leverage to the 1.33x ABT, the level of margin declines considerably.

Fitch's rating does not assume the county will fully leverage this pledged revenue stream. The county has indicated that it currently has no plans to leverage to the ABT although it is contemplating an additional issuance of TDT bonds in three or four years; in the county's plans, coverage would remain robust as it will wrap it around the existing structure. Debt service declines by $20 million beginning in fiscal 2025 and over $200 million of outstanding par is scheduled to be paid over the next five fiscal years.

Although not factored in Fitch's analysis of the TDT's financial resilience the county maintains substantial reserves accumulated from prior year's surplus TDT revenue that are legally available to cover any future shortfalls. Reserves include a convention center renewal and replacement fund of $59.5 million (equal to the county's targeted level of 4% of the value of convention center plant and equipment), and $35.8 million of additional reserves.

The resolution provides for the release of all or part of the fifth cent pledge upon board approval, as long as remaining pledged revenues in each of two consecutive years within a 30-month period equal or exceed 150% of MADS. The county may choose to release either the full cent or one-half of the fifth cent if the test conditions are met.

Additional information is available at 'www.fitchratings.com'.

In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from Lumesis and InvestorTools.

Applicable Criteria

U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)

https://www.fitchratings.com/site/re/879478

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https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1014450

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1014450

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https://www.fitchratings.com/regulatory

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