Approximately $137.8 Million of Debt Affected
Tax Allocation Bonds, 2011 Series A (Fremont Merged Redevelopment Project)
Expected Sale Date
Tax Allocation Bonds
NEW YORK, Feb 17, 2011 -- Moody's Investors Service has assigned an A2 rating to the Redevelopment Agency
of the City of Fremont (Fremont Merged Redevelopment Project) Tax Allocation
Bonds, 2011 Series A.
The current offering is secured by a first lien on tax increment
revenues generated within the Agency's Merged project area, net of the
county administration fee, housing set-aside funds, and senior pass-through
obligations. The rating reflects the large size of the project area which
benefits from its location in the large San Francisco Bay Area economy; the very
strong ratio of incremental to total assessed value which limits volatility; the
relatively low concentration of the project area in the top ten taxpayers; and
the strong projected coverage of debt service and comparatively high
additional bonds test. The Agency has no parity debt outstanding.
PROJECT AREA IS LARGE, DIVERSE THOUGH NOT IMMUNE TO ECONOMIC CYCLES
The project area is large and diverse, both key credit strengths, but still
somewhat vulnerable to economic cycles. The project area consists of four
sub-areas totaling 3,913 parcels, but is defined primarily by Industrial project
area which represents about 75% of both total parcels and assessed value. True
to its name, Industrial is an industrial project area. The city of Fremont is
located in the San Francisco Bay Area not far from Silicon Valley, and the
project area benefits from this location. Industrial is characterized largely by
manufacturing of high-end computer equipment and peripherals. The agency reports
that the items produced in this area are generally specialized, and are
not likely to be shipped overseas for mass production. The top ten taxpayers
represent 28.9% of total AV, which is diverse by comparison with the typical
redevelopment project area. However many of the taxpayers are not ultimate
users, but lease out their spaces, suggesting some economic vulnerability. In
fact, the agency reports that vacancy rates recently reached as high as
about 18%, though still below the peak of over 20% experienced during the
dot.com recession in 2002-03. The economic recovery appears to be taking hold,
as the agency reports vacancy rates currently at about 14% and slowly declining.
The project area's vulnerability to economic cycles is a negative factor, but it
is mitigated by the agency's strong debt service coverage and ABT: even if the
agency were to issue to the level of its ABT and AV were to be reduced by 15%,
the project area could lose taxpayers equivalent to the top ten and still
generate more than sum-sufficient coverage.
Despite a recent decline, the project area AV remains large and is unusually
stable. A key credit strength is the fact that incremental AV is an unusually
large portion of total AV, minimizing revenue volatility: the merged project
area's incremental AV is 90% of total, and Industrial's incremental AV is 98% of
total. After growing in fiscal 2008, 2009 and 2010, the merged project area
experienced a 5.5% AV decline from $4.1 billion in fiscal 2010 to the current,
still large, $3.8 billion. The decline was broadly based across all four
sub-areas, with Industrial falling by 7.1%. The agency suggests that this
decline was in part due to the county assessor's pro-active reduction of AV
pursuant to Proposition 8. Such reductions have been common throughout the state
with respect to residential properties, but have been less so with respect to
non-residential parcels. Despite the assessor's reduction, there are still a
substantial number of appeals outstanding. The agency attributes this to
property owners' sophistication, which translates into a willingness to
appeal their AV on a regular basis. The highest reduction granted appellants in
recent years was 12.2% of appealed value in 2008, followed by 3.0% in 2009.
Moody's believes continued moderate AV reduction is a possibility, but given the
strong projected debt service coverage at the current AV level, it is unlikely
that such a reduction would lower coverage sufficiently to materially damage the
bonds' credit profile.
HEALTHY DEBT SERVICE COVERAGE EXPECTED OVER THE LONG TERM
The agency's strong projected debt service coverage is an important
credit positive. Projected fiscal 2011 net revenues provided 2.27x coverage of
projected maximum annual debt service (MADS). The agency currently has no parity
debt outstanding, having paid off in its entirety the 2004 tax allocation bond
issue. The 2004 bonds were prepaid from cash on hand, based upon the agency's
analysis of interest earnings on that cash compared to the cost of borrowing.
The current issue is expected to fund the Agency's one, large project for the
foreseeable future: its contribution to a new Bay Area Rapid Transit station.
The Agency has no plans to issue additional debt, expecting that the additional
capital projects will be cash funded. The ABT of 1.50x is above the more typical
1.25x level, helping ensure that debt service coverage will remain comparatively
strong even in the event of additional leverage. The conservative bond structure
which contemplates level debt service also is a credit positive, as it does not
depend upon AV growth to generate continued sound coverage.
GOVERNOR'S PROPOSAL TO ELIMINATE REDEVELOPMENT AGENCIES POSES MINIMAL CREDIT
The Governor's budget recommends phasing out redevelopment agencies beginning in
fiscal 2012 while maintaining the security of outstanding debt. Redevelopment
agencies will be eliminated, and successor agencies will be required to retire
agency debts in accordance with existing payment schedules. Pledged incremental
revenue would continue to flow first to the tax allocation bonds and then to the
state. The proposal introduces uncertainty but we think the risk is low that any
changes would affect the security pledge on tax allocation bonds. Moody's
does not believe the credit risk is material as the governor specifically
asserted in his proposal that no existing obligations will be impaired.
The proposal also constrains issuance of additional debt secured by
incremental revenues, which in itself is a credit positive because it
reduces the possibility of future leveraging. However, many agencies are issuing
debt now in advance of this possible constraint, a factor incorporated into the
rating. Beginning in fiscal 2012 existing agencies would be required to cease
creation of new obligations. A constitutional amendment would provide for a
55-percent voter approval of bonding against local revenues for redevelopment
projects such as those currently funded with tax allocation bonds. The
voter approval requirement effectively reduces the possibility of
additional leveraging of incremental net revenues, thus protecting coverage of
existing debt service.
The state Controller recently launched an investigation into a number of
redevelopment agencies, including Fremont. The Controller's stated intention is
to bring facts to bear on the discussion surrounding the utility of
redevelopment agencies. The investigation has been completed, but results not
yet released. The agency has no reason to believe that the investigation into
its operations revealed inappropriate facts or activities. In any event,
Moody's believes the results of such an investigation would have no effect
on the security of the bonds, and it is therefore not a credit negative.
What could change the rating-UP
Continued growth of merged project area
Increased diversity and economic stability among taxpayers
Higher debt service coverage maintained over the long term
What could change the rating-DOWN
Extended, material decline in AV
Lower ratio of incremental to total AV
Increased concentration among the top taxpayers
Decline in debt service coverage
Project area acres: 3,913
Assessed value, fiscal 2011: $3.8 billion
Change in AV, fiscal 2010 to 2011: -5.5%
Incremental AV as % of Total AV: 90.2%
Top ten taxpayers as % of Incremental AV: 28.9%
MADS coverage, projected fiscal 2011: 2.27x
This is the first rating action for the Fremont Redevelopment Agency
Merged Project Area Tax Allocation Bonds.
The principal methodology used in this rating was Moody's Analytic Approach To
Rating California Tax Allocation Bonds published in December 2003.
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.
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Public Finance Group
Moody's Investors Service
Public Finance Group
Moody's Investors Service
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MOODY'S ASSIGNS A2 RATING TO FREMONT REDEVELOPMENT AGENCY TAX ALLOCATION BONDS, 2011 SERIES A
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