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LCEC S&P Rating on HOT-Tax Bonds

LCEC S&P Rating on HOT-Tax Bonds

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Published by: Irving Blog on Jun 01, 2012
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Summary:
Irving, Texas; Miscellaneous Tax
Primary Credit Analyst:
Sarah Smaardyk, Dallas (1) 214-871-1428; sarah_smaardyk@standardandpoors.com
Secondary Contact:
Horacio Aldrete-Sanchez, Dallas (1) 214-871-1426; horacio_aldrete@standardandpoors.com
Table Of Contents
May 30, 2012
www.standardandpoors.com/ratingsdirect
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Summary:
Irving, Texas; Miscellaneous Tax
Credit Profile
US$143.66 mil spl tax rev bnds ser 2012A due 08/15/2042
Long Term Rating 
B/Stable NewUS$70.0 mil spl rev imp bnds ser 2012B due 08/15/2042
Long Term Rating 
B/Stable NewUS$33.215 mil spl rev rfdg bnds ser 2012B-1 due 08/15/2042
Long Term Rating 
B/Stable NewIrving Misc Tax
Long Term Rating 
BBB+/Watch Neg On CreditWatch Negative
Rationale
Standard & Poor's Ratings Services assigned its 'B' long-term rating to Irving, Texas' series 2012A special taxrevenue bonds, series 2012B special revenue improvement bonds, and series 2012B-1 special revenue refundingbonds. We understand that the 2011 occupancy tax revenue bonds will be refunded as part of the series 2012Bspecial revenue refunding bonds. At this time, Standard & Poor's has placed the 'BBB+' rating on the series 2011bonds on CreditWatch with negative implications due to the uncertainty associated with the sale of the series2012B-1 special revenue refunding bonds. Once the series 2011 bonds have been refunded, we will withdraw therating on those bonds.The 'B' rating reflects our view of:
The series 2012 bonds' lack of an additional bonds test, which could drastically reduce debt service coverageshould the city decide to issue additional bonds;
The historical cyclicality associated with the pledged revenue stream, which has experienced significant declinesduring previous economic recessions;
Very weak coverage of projected maximum annual debt service (MADS), and this assumes annual revenueincreases and general fund support from the city for some outstanding hotel-tax supported debt.
Likelihood that the city's 2% hotel occupancy tax (HOT) revenues could not alone support the series 2009certificates of obligation, which would require the city to raise its pledged back up ad valorem tax rate by 8.5cents; and
Inclusion no, this is a developer commitment, separate of the city's bond issues of $80 million from The LasColinas Group; if this amount is not received, it could cause the city to issue additional debt.The 2012 bonds are secured by a first lien pledge on a 9% HOT. City officials indicate they will use proceeds fromthe series 2012A and 2012B bonds to construct an entertainment center and related infrastructure. They anticipateusing the series 2012B-1 bonds to refund the series 2011 hotel occupancy revenue bonds, which were privatelyplaced with the Bank of America. Under the series 2011 agreement with the Bank of America, the bank has toapprove the issuance of any additional debt back by hotel occupancy tax revenues. We understand that the cityplans to refund its 2011 bonds with the proceeds from the series 2012B special revenue refunding bonds. Once the
Standard & Poors
| RatingsDirect on the Global Credit Portal |
May 30, 2012
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series 2011 bonds have been refunded, we will withdraw the rating on the series 2011 bonds.Irving, with a population of 213,700, is centrally located in the Dallas-Fort Worth metroplex, adjacent toDallas-Fort Worth International Airport, which has fueled its development as a manufacturing and distributioncenter. Irving's Las Colinas is home to several international corporate headquarters, including Exxon Mobil,Kimberly-Clark, Commercial Metals, and Fluor Corp.The city is home to a broad base of hotels that offer an estimated 11,428 rooms; the average occupancy rate was65% in fiscal year 2011, up from 59% in 2010. The average daily room rate, which is a better indicator of revenuestability, has increased by approximately $2.30 to $86.54 in 2011 compared to 2010.The city experienced a 15.5% increase in pledged revenues in fiscal 2011; a significant portion is attributable toSuper Bowl XLV, which was held on Feb. 6, 2011 and brought pledged revenues to $18.2 million. Excluding fiscalyear 2012 projections, revenues have increased by 1.8% annually over the past five years. In general, hotel taxrevenues have exhibited a relatively strong cyclicality, declining rather significantly during periods of economicrecession, making year-to-year predictions difficult. Although city officials originally projected a 6% increase inpledged revenues for fiscal year 2012 from 2011 revenues of $18.2 million, the city now estimates that pledgedrevenues will decline by 5.7%, or $1.03 million, in fiscal year 2012 to $17.2 million.The HOT revenues are pledged on a prior lien basis to the city's series 2009 certificates of obligation. As additionalsecurity for the certificates, the city pledged its limited ad valorem taxing authority to the series 2009 certificates.Based on fiscal year 2011 audited figures, the 2% HOT produced just 0.65x coverage, which was insufficient tocover annual debt service payments on the series 2009 certificates. The revenue projections considered by the city inthe funding of the series 2012A, 2012B, and 2012B-1 bonds are based on the assumption that the city would fullysupport the series 2009 certificates with ad valorem tax revenues, thus effectively freeing the revenues from the 2%HOT to be used for repayment on the series 2012 bonds. According to city officials, if the city decides to fullysupport the debt service payments on the series 2009 certificates with ad valorem taxes, it would require a tax rateincrease of 8.5 cents per $100 of assessed value, which we believe may pose a significant fiscal and politicalchallenge.The audited fiscal year 2011 revenues derived from the entire 9% HOT provided coverage of all outstanding paritydebt that we believe is weak: 0.96x of projected 2013 debt service. Coverage of MADS (which occurs in 2039)based on fiscal year 2011 revenues is very weak in our view, at 0.5x. Even if the debt service from the city's series2009 certificates of obligation is excluded, coverage of MADS on the series 2012A, 2012B, and 2012B-1 bonds isweak at 0.78x in fiscal year 2039. As illustrated in the coverage calculations above, the ability of the pledgedrevenues to cover future debt service payments is predicated on consistent future growth. A forecast presented to usby city officials estimates consistent future annual growth in pledged revenues of 1.5%, following a projected 7.5%growth in fiscal year 2012, which we believe is overly optimistic, based on the city's current estimate of a 5.7%decline, and inconsistent with historical growth patterns in the city and overall in our universe of rated hoteltax-secured bonds. While it is reasonable to expect that, on average, there will be future growth in the city's HOTcollections during the next 30 years, the forecast on which the bonds are constructed does not reflect, in our view,the volatility of the revenue stream. We believe that the volatility inherent to the pledged revenues could result ininsufficient coverage of debt service in a particular year, even if over the longer term the average annual growth ratein the forecast is met.
www.standardandpoors.com/ratingsdirect
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Summary: Irving, Texas; Miscellaneous Tax

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