Fitch Rates Hillsborough County, FL's Fifth-Cent TDT Bonds 'AA-'; Outlook Stable
--$33,325,000 refunding revenue bonds, series 2016.
The bonds are scheduled to sell competitively on September 23. Proceeds will be used to refund the outstanding fifth-cent TDT refunding revenue bonds, series 2006A and repay $16.5 million of commercial paper which funded renovations to Amalie Arena, home of the Tampa Bay Lightning.
In addition, Fitch affirms the following ratings:
--$23.7 million outstanding fifth-cent TDT refunding and improvement revenue bonds, series 2006A at 'AA-'.
The Rating Outlook is Stable
The fifth-cent TDT revenue bonds are secured by the county's fifth-cent tourist development tax, part of a 5% tax levied on hotel and motel charges.
KEY RATING DRIVERS
The 'AA-' rating on the fifth-cent TDT bonds is based on strong prospects for continued TDT growth, solid coverage of debt service and the high likelihood that the revenue stream will not be leveraged down to the 1.5x maximum annual debt service (MADS) additional bonds test (ABT), enhancing overall resilience.
Economic Resource Base
The county along with its largest city, Tampa, serves as the economic center for Florida's Gulf Coast with major sectors of business services, government, health care, education and tourism. MacDill Air Force Base and the Tampa Port are major economic engines. Following a severe recession, the county has been experiencing a sustained and vigorous recovery, characterized by strong and consistent job growth since 2010, a rebound in housing and the resumption of tax base growth in fiscal 2014.
PLEDGED TDT DOWNTURN: Sustained reductions in fifth-cent TDT revenues or significant additional leveraging of the revenue stream which narrow debt service coverage would be viewed as negative credit developments.
TDT RATING NOT LIMITED BY IDR: Fitch views the pledged TDT revenues as special revenues under section 902(2)(B) of the bankruptcy code so their rating is not capped by the county's Issuer Default Rating (IDR).
The county is located along the western coast of Florida with a population of 1.35 million. Following a severe recession, the county's employment base is now in its seventh consecutive year of growth. Employment levels now far exceed peak levels achieved in 2007. The steady increase in employment has pushed the county's unemployment rate to below the state and national rates.
The housing market continues to thrive after the period of sharp declines, with values up 7% over the past 12 months, according to Zillow Group. Since the low in November 2011, housing values have grown by over 50%. The recovery in housing has boosted the county's tax base, which experienced considerable losses during the recession. Taxable values reversed the downward trend in fiscal 2014, growing by 5.4%. Growth has subsequently continued with increases of over 7% in fiscals 2015 and 2016.
Projects such as the planned expansion of insurer USAA which is projected to add 1,200 new jobs, a large upgrade at Tampa International Airport, a new Amazon distribution facility in the county and a proposed $1 billion waterfront mixed-use development project in Tampa are expected to further bolster job growth. Fitch believes that underlying economic characteristics of the county point to favorable prospects for continued tax base expansion and the continuation of brisk employment growth.
TDT REVENUE ANALYSIS
Florida statutes limit the use of the fifth-cent TDT by counties to pay debt service on bonds used to finance the construction, renovation or reconstruction of publicly owned and operated facilities of either a new professional sport franchise or a retained spring training franchise and to promote and advertise tourism in the state, nationally or internationally. Proceeds of the fifth-cent TDT were used to finance the construction of Amalie Arena, home of the Tampa Bay Lightning. The fifth-cent TDT expires when all bonds backed by the fifth-cent TDT fully mature. Issuance of additional bonds is limited by a 1.5x MADS ABT. There is no reserve fund associated with this issue.
The county levies the TDT up to five cents on the total rental amount paid from any person or party who rents, leases or lets for consideration living quarters for a period of six months or less. The TDT is levied by the county tax collector and, after deducting a 2% administrative fee, is remitted monthly to the county clerk of courts.
TDT collections have been volatile. After a period of rapid growth, TDT revenues declined by a cumulative 19.7% between fiscals 2007 and 2010, coinciding with the worst years of the great recession. Since fiscal 2010, TDT revenues have grown briskly for five consecutive years totaling over 54%. Fiscal 2015 collections are comfortably over pre-recession peak collections. TDT growth continues at a rapid pace as nine-month TDT revenues for fiscal 2016 are up 9.55% over the same period in fiscal 2015.
Debt service coverage of MADS on the refunding bonds, which include a new money component in the take-out of $16 million of commercial paper (CP) is robust at 2.35x. Debt service ratchets down in 2036 after the bonds associated with the refunding of the 2006 bonds are retired.
TDT growth prospects are strong and consistent with growth prospects of general revenues assessed at the 'aa' level. The county is experiencing significant development and job growth. These trends are expected to continue with planned developments. These plans include $2 billion of investment around the Arena and the Tampa waterfront spearheaded by the owner of the Lightning. A number of new hotels have opened within the city recently and occupancy and revenues per room have increased significantly over the past few years. Improvements at Tampa International Airport should also have a positive impact on tourism. With TDT revenues up nearly 10% in fiscal 2016, tourist activity continues to demonstrate strong momentum.
To evaluate the sensitivity of the dedicated revenue stream to cyclical decline, Fitch considers both revenue sensitivity results (using the same 1% decline in national GDP scenario that supports assessments in the IDR framework) and the largest decline in revenues over the period covered by the revenue sensitivity analysis. Based on the county's 15-year pledged revenue history, Fitch's analytical sensitivity tool (FAST) generates a 7% scenario decline in pledged TDT revenues. The largest actual cumulative decline in revenues was 20% from fiscals 2007-2010.
Based on current debt service coverage levels, the structure could tolerate a 57% drop in revenues, 8.2x the scenario results, and 2.9x the largest actual revenue decline in the review period. The latter test demonstrates nearly a 'aaa' level of cushion. However, when the same scenarios are measured assuming leverage to the 1.5x ABT, the margins of coverage decline significantly.
The county indicates that it does not intend to further leverage the fifth-cent TDT and is using TDT revenues after debt service to cover other obligations to the Arena. One of these obligations is a privately placed note issued in 2015 to refund outstanding Tampa Sports Authority (TSA) Arena refunding revenue bonds. The note is secured by non-ad valorem revenues of the county but excess fifth-cent TDT revenues are used to pay debt service. In addition, the county has been regularly reimbursing the Lightning for renovations to the Arena. In 2015, the county added a commitment for further reimbursement of $12.5 million and plans to issue about $2 million in CP each year to be repaid from fifth-cent TDT revenues after payment of TDT bond debt service and debt service on the note. These non-binding obligations will prevent the county from further leveraging the fifth-cent TDT for the foreseeable future.
The 'AA-' rating reflects strong prospects for further TDT growth, absent plans for further leverage and solid resilience of coverage through a moderate downturn scenario.
TDT RATING NOT CAPPED BY IDR
Special excise taxes on particular activities, such as hotel taxes (including the TDT), are considered by Fitch to be one of four self-evident types of special revenues defined under section 902(2) of the bankruptcy code and would not be capped by the county's IDR.