APPROXIMATELY $49.7 MILLION OF HOTEL TAX REVENUE DEBT AFFECTED
Hotel Tax Revenue Refunding Bonds, Series 2010
Expected Sale Date
Hotel Tax Revenue
NEW YORK, Jan 6, 2011 -- Moody's Investors Service has assigned an A1 rating to the San
Francisco Redevelopment Agency Hotel Tax Revenue Refunding Bonds, Series
2010, expected to be issued in the amount of approximately $49.7 million.
The revenue bonds are secured by a gross pledge of hotel room tax
revenues collected within specified areas of San Francisco in the vicinity of
the Moscone Convention Center. The rating primarily reflects San
Francisco's position as a pre-eminent tourist and convention market, the
exceptionally high debt service coverage by pledged revenues and an unusually
strong additional bonds test (ABT) . The high coverage and strong ABT mitigate
the key negative credit factor in this financing, the extreme concentration of
taxpayers. They also provide important credit support given the inherent
volatility of the pledged revenue stream. A debt service reserve sized at just
half the standard test three-part test is a comparative credit weakness.
Proceeds will be used to refund for debt service savings both of the
Agency's outstanding, parity obligations: Hotel Tax Revenue Bonds, Series 1994
and Hotel Tax Revenue Bonds, Series 1998.
STRENGTH OF VISITOR MARKET REFLECTS ECONOMIC RECESSION; BEGINNING TO SHOW SOME
The city and county of San Francisco is at the heart of the San Francisco Bay
Area. Leisure and hospitality services are the city's third largest employment
sector (after government) at 12.9% of the total. Full-service restaurants, which
cater to both residents and visitors, are the second leading industry at 42,600
employees. Traveler accommodation is the fourth leading industry in the city,
employing 23,800 as of 2009. Overall tourism performed well during the recent
recession by comparison with the prior, dot.com recession in 2001/2002.
San Francisco has benefited from a generally rising number of hotel room stays,
and the impact of the current recession has been more muted than that of the
2001/2002 recession. San Francisco had an estimated 15.4 million visitors in
2009, the last year for which figures are available, down from 16.4 million
visitors in 2008. The 2008 total was the culmination of six years of modest
annual growth. The recent decline, though significant, is moderate by
comparison with the steep decline from 17.3 million in 2000 to 13.7 million two
years later in 2002, resulting largely from the decrease in travel following
9/11 and the dot.com recession.
The impact of the current recession on hotel stays also has been
moderate compared to the prior recession. An estimated 4.5 million visitors of
the total 15.4 million stayed in hotels in 2009, down somewhat from 4.7 million
in 2008. Again the 2008 figure represented a steady increase since 2002. During
the 2001/2002 recession the number of hotel visitors fell from 4.3 million
in 2000 to 3.5 million in 2002. Occupancy rates, which averaged 79% in 2007 and
2008, fell to 75.5% in 2009, still well above the low of 65.4% in 2002 during
the dot.com recession. The current recession had a strong impact on daily hotel
room rates, unlike the other metrics discussed above, with the $160.27 average
annual room rate in 2009 well below the $190.28 peak in 2008.
Recent data suggest the beginnings of a recovery. By comparison with the prior
year, monthly occupancy rates improved substantially from January through
October 2010 (the latest month available). Room rates remained weak through
April 2010, but in May through September showed improvement over prior year
figures. The October 2010 room rate, however, was below the October 2009
figure, a reminder that the improvement, though notable, remains fairly tenuous
in line with the questionable strength of the economic recovery.
EXTRAORDINARY CONCENTRATION AMONG TAXPAYERS MITIGATED BY STRONG MARKET
The transit occupancy (hotel) taxes which secure the debt are collected and paid
by only a dozen hotels, an extraordinary level of concentration. These hotels
are large, strategically located 'convention hotels' which reap the benefits of
the city's visitor and convention market. The hotels providing the tax revenues
are primarily located around the city's Moscone Convention Center, a major
facility consisting of three buildings totaling more than 2 million square feet
and covering over 20 acres on three adjacent blocks in the heart of the
city. The convention center hosts large conferences ranging from about 1,000 to
45,000 attendees. Many of the conferences are held annually at the convention
center, and most are booked several years in advance. As recently as fiscal 2006
over 1 million attendees or exhibitors were registered or ticketed for an event.
The recession has significantly dampened that figure but it remains strong,
reported by the agency at about 858,000 in calendar 2010.
The 12 hotels providing the tax revenues represent a total of 4,987 rooms (vs.
33,372 rooms available citywide in 2008). Reliance upon just a dozen hotels, the
largest of which accounts for 30% of total tax revenues, is a substantial credit
negative incorporated into the rating. The attendant risk is largely
mitigated by the demand generated by the convention center specifically and
San Francisco as a travel destination more generally, together with very strong
projected debt service coverage of over 5.0x. Moody's believes that if revenues
from any one hotel are interrupted for reasons specific to that site, the
likelihood of continued strong demand for rooms would motivate a hotel operator
to make corrections and restore revenue flow quickly. In the interim, the other
hotels would be well positioned to raise their rates, picking up some of the
revenue slack. To the extent that this transition takes time, strong coverage is
available as a buffer for a period of more than five years, a critical factor in
VERY STRONG DEBT SERVICE COVERAGE AND ADDITIONAL BONDS TESTS ARE KEY TO RATING
A key credit strength of the current financing is the very healthy
5.7x projected coverage of maximum annual debt service (MADS) by
estimated fiscal 2010 revenues. This coverage level mitigates the
extreme volatility of the hotel tax revenues. These revenues rose in all but
four years since 1995 at rates ranging from 4.7% to 20.8% annually. The four
years of decline have been substantial: -22.8% and -5.6% in fiscal 2002 and 2003
during the dot.com recession, and -7.9% and -11.2% in fiscal 2009 and 2010
during the most recent recession. A modest negative is the fact that the agency
does not accumulate the excess revenues, but rather remits them to the city as
described below. The current issue is a refunding generating savings primarily
in the first three years; this structure is designed to provide budget relief
for the city as lower debt service allows the city to retain more of the hotel
The additional bonds test is strong at 3.0x MADS, although leveraging the
revenues to this level would be a material credit negative. The Agency has no
plans to issue additional debt.
STRUCTURE INCLUDES BOTH STRENGTHS AND WEAKNESSES
The bonds are secured by a 12% hotel tax levied by the agency on hotels located
within a predefined levy area. As a practical matter the tax is a carve-out of
the city's voter-approved 14% hotel tax: the agency is allowed to levy a
transient occupancy (hotel) tax to the extent that such a tax has been levied by
the city and the city allows a credit against its tax for amounts paid to the
agency. The credit allowed by the city is only in the amount of the debt
service(including reserve fund replenishment, as needed, and
administrative costs); the city retains the portion which is not needed for
debt service. This is a modest credit negative by comparison with hotel tax
revenue bond issuers which accumulate excess taxes in reserves that are pledged
exclusively for debt service payment.
The financing is expected to include a cash funded debt service reserve fund. It
will be sized at only half the standard three-part test, a credit weakness given
the volatility and passive nature of the revenue stream.
The city's tax collector remits all the tax revenues monthly to the
Trustee until the Trustee sends notice that the debt service requirements
have been met. This funding structure is a credit positive. The tax collector
receives the taxes from the hotel operators: the operator estimates the amount
owed for each quarter, makes estimated payments monthly for the first two months
of the quarter and trues-up in the third month. In the event that a hotel
operator in the levy area does not make the required payment, the tax collector
may take a variety of steps including audits, citations, filing suit, and
ultimately recording a tax lien against the hotel.
What could make the rating move - UP
-Increased number of hotels in the levy area providing greater diversification
What could move the rating - DOWN
-Decrease in the number of hotels in the levy area resulting in greater
- Decreased hotel tax revenues or increased leverage resulting in lower MADS
- Decreased level of cash-funded reserves
Total pledged revenue, fiscal 2009: $37.9 million
Total pledged revenue, fiscal 2010: $33.7 million (-11.2%)
Coverage of annual debt service, fiscal 2010 (unaudited): 6.05x
Projected coverage of maximum annual debt service (MADS) by fiscal
2010 revenues: 5.7x
Additional Bonds Test: 3.0x MADS
Estimated total number of visitors to San Francisco, 2008: 16.39 million
Estimated number of visitors staying in San Francisco hotel, 2008: 4.74 million
The principal methodology used in this rating was Piercing the G.O. Ceiling
published in December 2008.
Information sources used to prepare the credit rating are the following: parties
involved in the ratings, public information, and confidential and proprietary
Moody's Analytics information.
Moody's Investors Service considers the quality of information available on the
credit satisfactory for the purposes of assigning a credit rating.
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MOODY'S ASSIGNS A1 RATING TO SAN FRANCISCO REDEVELOPMENT AGENCY HOTEL TAX REVENUE REFUNDING BONDS
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