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MOODY'S ASSIGNS A3 RATING TO MIDTOWN REDEVELOPMENT AUTHORITY (TX) $35M TAX INCREMENT CONTRACT REVENUE AND REFUNDING BONDS, SERIES 2011

25 Jul 2011

AFFECTS $65.6M IN PARITY DEBT, INCLUDING THE NET IMPACT OF THE CURRENT ISSUE

Municipality
TX

Moody's Rating

ISSUE

RATING

Tax Increment Contract Revenue Refunding Bonds, Series 2011

A3

  Sale Amount

$35,150,000

  Expected Sale Date

07/30/11

  Rating Description

Tax Increment Contract Revenue

 

Opinion

NEW YORK, Jul 25, 2011 -- Moody's Investors Service has assigned an A3 rating to Midtown Redevelopment Authority's [TX] $35M Tax Increment Contract Revenue and Refunding Bonds, Series 2011. Concurrently, Moody's has affirmed the Authority's A3 rating affecting $65.6 million in parity debt, including the net effect of the current transaction. Bond proceeds will provide roughly $18 million for capital improvements and land acquisition Authority-wide and refund the Authority's outstanding Series 1998 and 2001 bonds for net present value savings and no extension of final maturity.

RATING RATIONALE:

Bonds are secured by the Contract Tax Increments, which represent receipts derived from growth in the property tax base within the zone by Houston, Harris County, Houston Independent School District (HISD) and Houston Community College (HCC) as more fully described below. The rating reflects the scope of the incremental tax base, an adequate legal structure and satisfactory debt service coverage levels. The rating also considers the relatively passive, concentrated nature of the authority's revenue stream.

STRENGTHS:

"Strong coverage of MADs

"Taxbase that is believed to have stabilized following one year of modest declines

WEAKNESSES:

"Concentrated nature of taxbase

"Ability for HISD to reduce participation

ZONE ABUTS HOUSTON CBD; SINCE INCEPTION GROWTH HAS APPROXIMATED $1B

Reinvestment Zone Number Two was created by the City of Houston in 1994 to facilitate economic development within the original 617 acres of the zone. The zone was subsequently expanded in 1999 by 153 acres and by 1.5 acres in 2009. The zone is located between the Houston CBD and the Texas Medical Center, with the majority of redevelopment to date occurring in that portion of the zone closest to the CBD. Since inception, zone taxable value has increased by $955 million, providing the revenue base to support the bonds largely through growth in the multi family sector. Management reports the zone is roughly 40% redeveloped and that significant mixed use and multi-family development activity is ongoing. The Midtown Redevelopment Authority is a local government corporation created by the city of Houston to administer the zone, with members of the Authority's Board of Director's appointed by the City of Houston.

REVENUE DERIVED FROM AGREEMENTS WITH THE CITY OF HOUSTON, HARRIS COUNTY, HISD AND HCC

Tax increments derived from contractual agreements with the City of Houston (GO rating Aa2, stable outlook), Harris County (GO rating Aaa, Watchlist for Possible Downgrade), HISD (GO rating Aaa) and HCC (GO rating Aa1) comprise the pledged revenue stream. The city is a full participant in the zone, and all taxes collected on the AV at the city's current tax rate, above the base year's AV (incremental value), are remitted to the authority. The county, including the county flood control district, participates in the original 617acre zone only at its current tax rate, it does not remit taxes for the annexed portions. Additionally, the county will end its participation at the earlier of either December 31, 2025 or when the tax increments contributed by the County totals $58.9 million. To date, the county has contributed $26 million and its participation is forecast to end in 2021 assuming no further growth in incremental value. HCC entered a participation agreement in 2008, which ends in 2025, and contributes it full tax rate in the full zone. The agreement requires funds be expended for HCC driven projects, but this does not alter the flow of funds or the pledge of HCC increment. One third of City, County and HCC increments are required to be spent for affordable housing projects. This requirement is satisfied through bond issuance such that the flow of funds in not impacted by this stipulation. Any change in tax rate assessed by these three entities would impact funds available for debt service.

The school district's agreement with the Authority provides for two separate structures that limit the incremental values in any given year to the lesser of the "limited captured appraised values" (based on growth projections determined in 1999) or the actual incremental values on the original and annexed portions. The limited captured appraised value is anticipated to be utilized each year. One-third of the school district's increments are used for affordable housing. In the original 617 acres, the Authority receives the district's full tax rate on the 1/3 for affordable housing. On the two-thirds not used for affordable housing, the authority is entitled to HISD increments in excess of $1.2 million derived from a tax rate of $6.40/$1,000. For the annexed area, the district pays increments based on a $9.60/$1,000 of A.V. tax rate. Of the two-thirds not used for affordable housing in the annexed area, one-third goes back to the district for educational facilities and one-third may be used by the Authority. With a year's notice, the district can reduce its overall increment tax rate to $6.40/$1,000. Furthermore, any change in state law that results in a loss of revenue to HISD tied to the district's participation in the Zone enables HISD to reduce its contribution in an equal amount. If revenues from HISD are excluded due to a legislative change or court ruling, coverage levels would be weakened. While Moody's believes the school district has demonstrated commitment to the zone, and realistic projections show the zone meeting coverage without district participation, the possibility of the district's reduced participation in tax increment reinvestment creates a measure of credit uncertainty.

INCREMENTAL VALUE GROWTH HISTORICALLY STRONG; IMPACTED BY CURRENT ECONOMIC CONDITIONS

Historically assessed value growth has been very strong, reflecting rapid redevelopment of this desirable acreage adjacent to downtown Houston. Tax year 2000-2010 total taxable value grew 11%, with incremental value growth in excess of 17%--inclusive of a 3.6% decline in 2010 total taxable value (4.4% decline in incremental value). Preliminary 2011 tax year values reportedly reflect stabilization of property values. Base year for the original zone was set with the 1995 assessed valuation (AV) and the annexed area's base year is 1999. The total tax base, including base value, is $1.16 billion-of which $952 million represents incremental value growth. From FY 2001-05, the values grew even more rapidly, at rates ranging from 23-48%. Additional growth moderation will occur due to the areas maturation as well as current economic conditions. The top ten taxpayers, mostly apartment properties, comprise a relatively concentrated albeit improved 27% of incremental value. The zone's largest employer is HCC, with approximately 800 employees. The College's central campus, serving 18,000 students, is also within the zone. The Houston Metro transit agency began operation of 7.5 mile light rail line in 2004. There are 39 blocks of Main Street within the zone with three METRORail stations.

SATISFACTORY COVERAGE OF MAXIMUM ANNUAL DEBT SERVICE PROVIDED BY 2010 REVENUES

FY 2010 revenues provide 2.7 times maximum annual debt service (MADS) following the current issue. There was a timing anomaly with one payer, net of which normalized coverage was a still strong 2.2 times. Preliminary unaudited 2011 increments provided similar levels of coverage. Net of the HISD increment, adjusted MADs coverage drops to 1.5 times. Fiscal 2010 City of Houston and HCC-only receipts cover current MADs by 1.1x-an important consideration given the likely sunset of County revenues well in advance of 2025. With the current new money issue, final debt maturity is extended to 2033. The HCC, HISD and County agreements end in 2025 with only the City agreement remaining in place for the final 8 years of the zone. Debt service, however, drops markedly such that FY2010 City of Houston increments provide 4.5x coverage of post 2025 debt service. Management reports additional borrowing plans approximating $12 million over the next 2-3 years. This debt is expected to be back loaded to take advantage of the significant capacity after 2025 when debt service declines substantially. The rate of principal retirement is average with 57% amortized in ten years. Future rating analysis will factor the structure of any future debt and the impact on credit quality.

ADEQUATE LEGAL PROVISIONS

The Authority's additional bonds test is 1.4 times average annual debt service, calculated without school district revenues. The debt service reserve requirement is equal to MADs and will be fully cash funded at closing. The flow of funds requires that pledged receipts flow directly from the City of Houston (who collects increment payments from participants) to a trustee held account. The first call on receipts is debt service-with the flow of funds requiring the subsequent 12 months of debt service payments be funded prior to release of any funds to the Authority. The participants obligation to remit tax increment payments extends only to property taxes as received such that any delinquencies would impact upon pledged revenues. The City of Houston approves the Authority's budget and debt issuances and is required to remit funds sufficient for debt service at a minimum-to the extent such funds have been provided by the various participants.

KEY STATISTICS:

Zone area: 770 acres

Full incremental value for fiscal year 2012 (projected, tax year 2010): $1.16 billion

Fiscal 2010 coverage of MADs post current issue: 2.2 times (normalized for 1x payment)

Principal retirement (10 years): 57%

WHAT COULD CHANGE THIS RATING UP:

"Significant growth in tax increment absent offsetting additional leverage

"Significant reduction in taxpayer concentration

WHAT COULD CHANGE THIS RATING DOWN:

"Significant additional leveraging that materially weakens coverage of MADs

"Marked decline in incremental values that materially weakens coverage

"HISD reduction in participation and/or county sunset that results in MADs coverage significantly below current levels

Midtown Redevelopment Authority's [TX] Tax Increment Contract Revenue Bond rating was assigned by evaluating factors believed to be relevant to the credit profile of the issuer such as i) the business risk and competitive position of the issuer versus others within its industry or sector, ii) the capital structure and financial risk of the issuer, iii) the projected performance of the issuer over the near to intermediate term, iv) the issuer's history of achieving consistent operating performance and meeting budget or financial plan goals, v) the nature of the dedicated revenue stream pledged to the bonds, vi) the debt service coverage provided by such revenue stream, vii) the legal structure that documents the revenue stream and the source of payment, and viii) the issuer's management and governance structure related to payment. These attributes were compared against other issuers both within and outside of Midtown Redevelopment Authority's core peer group and Midtown Redevelopment Authority's ratings are believed to be comparable to ratings assigned to other issuers of similar credit risk.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, and public information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a 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

Robyn Rosenblatt
Analyst
Public Finance Group
Moody's Investors Service

Adebola Kushimo
Backup Analyst
Public Finance Group
Moody's Investors Service

Contacts

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


Moody's Investors Service, Inc.
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New York, NY 10007
USA

MOODY'S ASSIGNS A3 RATING TO MIDTOWN REDEVELOPMENT AUTHORITY (TX) $35M TAX INCREMENT CONTRACT REVENUE AND REFUNDING BONDS, SERIES 2011
No Related Data.
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