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New Issue:

MOODY'S ASSIGNS A1 RATING TO SAN FRANCISCO REDEVELOPMENT AGENCY HOTEL TAX REVENUE REFUNDING BONDS

06 Jan 2011

APPROXIMATELY $49.7 MILLION OF HOTEL TAX REVENUE DEBT AFFECTED

Municipality
CA

Moody's Rating

ISSUE

RATING

Hotel Tax Revenue Refunding Bonds, Series 2010

A1

  Sale Amount

$49,695,000

  Expected Sale Date

12/15/10

  Rating Description

Hotel Tax Revenue

 

Opinion

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.

RATINGS RATIONALE

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 IMPROVEMENT

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 the rating.

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 taxes.

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 concentration

- Decreased hotel tax revenues or increased leverage resulting in lower MADS coverage

- Decreased level of cash-funded reserves

KEY STATISTICS:

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.

REGULATORY DISCLOSURES

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.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Analysts

Dari Barzel
Analyst
Public Finance Group
Moody's Investors Service

Eric Hoffmann
Backup Analyst
Public Finance Group
Moody's Investors Service

Contacts

Journalists: (212) 553-0376
Research Clients: (212) 553-1653


Moody's Investors Service
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New York, NY 10007
USA

MOODY'S ASSIGNS A1 RATING TO SAN FRANCISCO REDEVELOPMENT AGENCY HOTEL TAX REVENUE REFUNDING BONDS
No Related Data.
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