Fitch Affirms Morgan Hill RDA, CA's Refunding Revenue Bonds 'AA-'; Outlook Stable
--$74.3 million refunding revenue bonds series 2013A at 'AA-';
--$7.3 million refunding revenue bonds series 2013B (taxable) at 'AA-'.
The Rating Outlook is Stable.
The bonds are payable from all tax increment revenue from the Ojo De Aqua project area, net of county administrative expenses. The bonds have a cash-funded debt service reserve fund sized to 100% of maximum annual debt service (MADS).
KEY RATING DRIVERS
ROBUST ASSESSED VALUE CUSHION: The 'AA-' rating reflects strong debt service coverage and a wide cushion between current assessed values (AVs) and levels that produce just sum-sufficient coverage.
SOLID PROJECT AREA CHARACTERISTICS: The rating also reflects the medium-sized project area's diverse, mature, and resilient tax base, and prospects for continued growth. The project area is situated in Morgan Hill, which benefits from freeway access to the large and prosperous San Jose employment region.
SOUND LEGAL STRUCTURE: The bonds include a cash-funded debt service reserve fund and a closed lien. A court-approved validation agreement confirms the availability of former housing set-aside funds for debt repayment, and all pass-through payments have been subordinated to debt service.
The rating is sensitive to shifts in fundamental credit characteristics including debt service coverage, project area characteristics, and tax base performance. The Stable Outlook reflects Fitch's expectation that such shifts are unlikely.
The RDA is located in the city of Morgan Hill in southern Santa Clara County, about 20 miles southeast of San Jose.
ROBUST AV CUSHION; STRONG DEBT SERVICE COVERAGE
Fitch estimates AV could fall by a severe 66.5% from fiscal 2016 levels before MADS coverage would decline to 1.0x. This compares extremely well to the project area's adjusted peak to trough AV decline of 5.7% during the housing-led recession.
The bonds benefit from strong debt service coverage. Fitch estimates fiscal 2016 net tax increment of $22.8 million covers MADS of $6.9 million 3.28x. The level of outstanding appeals is not material. Conservatively assuming no AV growth in fiscal 2017 and 100% of appeals are granted MADS coverage drops to a still strong 3.22x.
SOUND PROJECT AREA CHARACTERISTICS
The project area is medium-sized relative to those of other Fitch-rated redevelopment agencies at 2,265 acres, equivalent to about one-third of the city's total acreage, and was formed in 1981. AV consists mostly of residential (61% of AV) properties, with significant commercial (17%) and industrial (12%) components. The project area is quite mature, as exhibited by its high IV-to-base year value of 1789%.
Concentration among the top taxpayers is minimal, with the top 10 payers making up 8% of AV (9% of IV). Historical AV performance has been relatively stable despite significant home value losses during the recession, reflective of the maturity of the tax base. Following a moderate 4.6% increase in AV in fiscal 2014, growth accelerated in fiscals 2015 and 2016, increasing by a strong 9.6% and 6.9%, respectively, driven by a combination of restoration of property values under Proposition 8, and new construction within the project area. Healthy increases in new construction activity bode well for future AV performance.
SOLID, GROWING LOCAL ECONOMY
Morgan Hill is a bedroom community to the greater San Jose employment region. Its economic characteristics are above average overall. The city's median household income equals 156% and 180% of state and national averages. Fueled by meaningful annual employment growth, unemployment decreased significantly in the current year, and the 4.4% June 2015 unemployment rate is now well below state and national averages of 6.2% and 5.5%, respectively.
The city is well positioned for growth given its location within the prosperous San Jose employment market and the availability of vacant land. Management is anticipating higher than normal residential development over the next few years, with approximately 919 units expected to be built over the next few years. Much of the growth is expected to occur in the project area. Upon completion, the housing developments are expected to increase AV by approximately $250 million (about 10% of fiscal 2016 AV). Additionally, there is ongoing development on the commercial and industrial side.
REDEVELOPMENT DISSOLUTION - NEUTRAL TO POSITIVE IMPACT
In May 2014 Fitch refined its California RDA analysis pertaining to the beneficial impact of dissolution legislation (AB 1X 26). Fitch now considers TAB liens to be closed and surplus housing revenues to be available for non-housing TAB debt service. Although uncertainties remain, Fitch views the continued presence of closed TAB liens and surplus housing revenue availability as more likely than not to remain a feature of California TABs.
COMPLIANCE WITH DISSOLUTION PROCEDURES
Dissolution-related (AB 1X 26) risks are lessening as management is continuing to adhere to indenture requirements, necessary revenue tracking is in place, and timely and robust continuing disclosure reports are being provided. Since dissolution, the RDA's procedures to manage dissolution have become well-established, lessening operational risks.