OREANDA-NEWS. Fitch Ratings maintains the following Arizona Sports and Tourism Authority, AZ (the authority) bonds on Rating Watch Negative:

--$262 million senior lien revenue bonds, series 2007A and 2012A rated 'A';
--$4.37 million subordinate lien revenue bonds, series 2013 rated 'BBB+'.

SECURITY
The senior lien bonds are secured by a first lien on pledged revenues, which consist of a countywide car rental and hotel occupancy tax and facility-related taxes and revenues. The subordinate lien bonds are secured by a subordinate lien on pledged revenues after payment of statutory tourism promotion contributions, indexed 5% per year from a June 2001 base amount of $4 million. There is no debt service reserve fund for the senior bonds, but there is a fully cash-funded standard debt service reserve fund for the subordinate bonds which will be applied to the final debt service payment of the subordinate bonds in fiscal 2016.

KEY RATING DRIVERS
CONTINUED LEGAL UNCERTAINTY: The Negative Watch indicates concern over the potential interruption or cessation of car rental tax revenues, which represent approximately 30% of a narrow and economically sensitive pledged revenue stream.

APPEAL OF COURT RULING: This rating action incorporates Fitch's understanding that the authority and the Arizona Department of Revenue (ADOR) as co-defendant will appeal the court ruling should the courts eventually uphold the Maricopa Superior Court June 16, 2014 ruling. The appeal process is expected to extend over several years.

ONGOING TAX COLLECTIONS: The current rating action also assumes that the authority will continue to collect car rental tax revenues during the appeal process, as it has to date.

NARROW PLEDGED REVENUES: The primary revenue sources are susceptible to fluctuations in economic conditions. The balance of pledged revenue is even narrower, relying on activity at the stadium.

ADEQUATE DEBT SERVICE COVERAGE: Coverage of the authority's stadium bonds remains adequate for the respective rating levels assuming continued car rental tax collections, despite the economic and revenue challenges of the recent past. Bond indenture provisions include a below-average additional bonds test, although the authority does not anticipate new debt issuance at this time. Fitch believes that the prospects for new debt issuance are remote while litigation is ongoing.

POSITIVE ECONOMIC PROSPECTS: The authority participates in the broad and diverse greater Phoenix area economy which has near-term growth prospects. Maricopa County unemployment, income and wealth indicators compare favorably to state and national averages.

EXPIRATION OF TOURISM REVENUES: The availability of tourism-related revenues, which account for more than 60% of pledged revenue, terminates several years prior to final maturity on the bonds. The sufficiency of facility-related revenue for the modest remaining debt service, combined with the potential to repay debt early or reauthorize the tourism taxes somewhat tempers this risk.

RATING SENSITIVITIES
FAVORABLE RESOLUTION OF LITIGATION: Final resolution of litigation pertaining to the legality of pledged revenues in favor of the authority would likely result in removing the Negative Watch.

ELIMINATION OF PLEDGED REVENUE: Conversely, resolution that eliminates the car rental tax from pledged revenue, without compensating action by the state of Arizona legislature to replace it with a revenue stream sufficient to satisfactorily cover debt service, could result in ratings dropping to below investment-grade levels.

INTERRUPTION OF TAX REVENUES: The rating would be adversely affected by any interruption of car rental tax collections during the appeal process without compensating action to replace it. A requirement to reimburse taxpayers for previously collected taxes would heighten negative rating pressure.

CREDIT PROFILE
The authority is located in Glendale, Arizona, within Maricopa County. Created as a political subdivision of the state in 2000, the authority was formed to construct, finance, and operate the University of Phoenix Stadium and to promote tourism, major league baseball spring training (the Cactus League), and youth and amateur sports within Maricopa County.

The stadium is home to the National Football League's Arizona Cardinals and the Annual Tostitos Fiesta Bowl. The stadium hosted the Super Bowl XLIX in 2015 and will host the College Football Playoff Championship Game in 2016. The stadium also hosts a variety of entertainment, other sporting events, and business events throughout the year.

CONTINUED UNCERTAINTY FROM CAR RENTAL TAX LITIGATION

On June 16, 2014, the Superior Court of Arizona Maricopa County issued an Under Advisement Ruling stating that because the car rental tax relates to the use and operation of vehicles on the highways and streets of the state, proceeds can only be used for public highways or streets as set forth in the Arizona constitution.

The Superior Court denied the motion to reconsider the initial ruling in March 2015 and ruled on retroactive application of the order in July 2015. The court's final judgement is expected as early as the end of the calendar year. Fitch expects both the plaintiff and defendant to file appeals on various issues, which process is generally expected to proceed over several years. Fitch will continue to monitor the litigation as it proceeds.

TOURISM REVENUES REFLECT GROWTH

Countywide tourism tax revenues contribute about 60% of fiscal 2014 pledged revenues and include the car rental surcharge and a 1% tax imposed on the cost of each lodging transaction within the county. The car rental surcharge is imposed at the rate of (i) 3.25% of the gross proceeds or gross income from the business or (ii) $2.50 on each rental transaction, whichever is more. The first $2.50 on each rental transaction is distributed by the state to the Maricopa County Stadium District (MCSD; another agency involved with spring training baseball facilities in the county), so the pledged portion is effectively the difference between $2.50 per transaction and 3.25% of gross proceeds or gross income, for transactions in which the latter is the higher amount. The tourism tax component of pledged revenues is currently authorized through April 2031.

The authority has an intergovernmental agreement in place with the MCSD, its partner in the Cactus League promotional program, to receive excess rental car surcharge taxes from MCSD. Officials expect to receive about $1.3 million per year from the five-year forecast period. The authority plans to use this money for payment toward the various intergovernmental agreements (IGAs) with the local municipalities for the renovation and/or new construction of multiple MLB Spring Training facilities throughout Maricopa County.

Fiscal 2014 pledged tourism tax revenues of $27.5 million reflect five-year compound annual growth of 7.9%, consistent with regional economic improvement. Strong unaudited fiscal 2015 tourism tax revenue growth of 10.5% benefit from the stadium's hosting of the Pro Bowl and Super Bowl. Fitch expects tourism tax revenues to remain volatile and sensitive to changes in economic conditions over the long-term horizon.

SATISFACTORY DEBT SERVICE COVERAGE

Senior lien bond debt service coverage for fiscal 2015, using fiscal 2014 pledged revenues, is sound at 2.74x and all-in coverage is satisfactory at 1.56x. Fiscal 2014 pledged revenues cover maximum annual debt service (MADS; occurring in 2031) 1.79x; the coverage performs well to Fitch's stress testing.

The subordinate lien bonds are secured by the same pledged revenues after payment of the senior bonds and required tourism promotion contributions. Fitch takes some comfort from the authority's flexibility regarding annual distributions for other programs, including tourism-related functions (the payment for which occurs prior to subordinate lien debt service in the flow of funds).

The authority's enabling legislation requires pledged revenue distributions (after all debt service) for Cactus League spring baseball training purposes and youth and amateur sports. Remaining revenues after these applications are used for the operational expenses of the facility.

FACILITY REVENUES COVER OUTER-YEAR DEBT SERVICE 3x

The other major pledged revenue source - facility revenue - is comprised of certain state income taxes from Cardinal operations, sales taxes on retail, restaurant and events, and other facility revenues (e.g. payments from conventions, lease and rental revenues, admissions, and concessions).

A modest 1.65% of spending deficit in the authority's fiscal 2016 budget is improved from recent years. Outer years of the authority's five-year forecast continue to reflect varying levels of structural imbalance.

Annual debt service drops from $24.6 million in 2031, when the current authorization of tourism-related taxes expire, to roughly $5.5 million from 2032 to 2036. Fiscal 2014 facility revenue of $16.3 million equates to 3x the authority's annual debt service scheduled in the outer years of 2032 through 2036. The state legislature may also reauthorize the tourism-related taxes given the economic impact of the stadium and cactus league activities on the region, but this is not assumed in Fitch's ratings.

BELOW-AVERAGE ADDITIONAL BONDS TEST/NO NEW DEBT PLANNED

The indenture includes a weak additional bond coverage test of 1.3x for senior and 1.15x for subordinate bonds. For purposes of calculating the test, tourism tax revenues are included only for those years during which the law provides for the distribution of those tax revenues to the authority. However, the authority does not plan to issue additional debt in the foreseeable future and Fitch does not anticipate additional issuance prior to culmination of the car rental litigation currently underway.

Management reports that modest capital needs at the facility will be funded with cash. The authority plans to contribute to area spring training baseball capital projects on a pay-as-you-go basis. The authority also plans to meet its contributions to area spring training baseball capital projects by making annual payments pursuant to the IGAs with local cities.

FAVORABLE MARICOPA COUNTY ECONOMIC INDICATORS

Consistent with the growth of tourism revenues, strengthening of the regional economy is evidenced by significant new development and employment base growth.

The county unemployment rate of 4.7% as of March 2015 is below state and national levels of 5.4% and 5.6%, respectively, for the same period. Favorable growth prospects are supported in the near term by an expanding population base, recovering housing market and new electronics and manufacturing sector investments. Governmental, health services and education sector top employers lend stability to the local employment base. Income and wealth levels continue to trend above those of the state and U.S.