AFFECTS $27.9M IN PARITY DEBT, INCLUDING THE CURRENT ISSUE
Tax Increment Contract Revenue Bonds, Series 2010
Expected Sale Date
Tax Increment Contract Revenue Bonds
NEW YORK, Oct 18, 2010 -- Moody's Investors Service has assigned a Baa2 rating on the Old
Spanish Trail/Almeda Corridors Redevelopment Authority's [TX] $22 million Tax
Increment Contract Revenue Bonds, Series 2010. Concurrently, we have affirmed
the Baa2 rating on $27.9 million in parity debt, including the current issue.
Bond proceeds will be used for road reconstruction, park improvements and the
construction of a new Houston Public Library.
The rating reflects a history of growth in pledged revenues that
provides satisfactory coverage levels, a concentrated tax base, adequate legal
structure, and risk associated with the participation of Houston Independent
School District (HISD). Annual principal and interest requirements are payable
from the contract tax increments, certain other funds on deposit with the
trustee or which may be deposited with the trustee in the future, and earnings
and investments. Reductions in coverage caused by further declines in
incremental values, further leveraging or changes in participation levels could
impact credit quality.
SOLID GROWTH IN INCREMENTAL VALUES
The Old Spanish Trail/Almeda Corridors Redevelopment Authority was created by
the City of Houston to facilitate development of 656 acres located between the
Houston Medical Center and blighted areas in south central Houston. The tax base
of the zone was frozen as of the date of the creation in 1997, and expanded with
a subsequent annexation (to 1,215 acres), at $177 million. Assessed values
(A.V.) in the zone have shown a trend of steady growth, which reversed in tax
year 2010 (fiscal 2011) with a -3.9% decline in total full value, driving a 4.7%
decline in incremental value. The taxable full value is projected (5% remains
uncertified) at $961 million in 2011. The difference between the base value and
the 2011 A.V. is the incremental value on which taxes are levied to repay debt
service requirements, resulting in incremental value of $783 million.
Incremental value growth over the last five years has averaged a strong
18.5%. This rate of growth reflects significant development within the
Authority, particularly of new multi- family projects . Development within the
Authority has largely abated aside from more modest single family and commercial
development. Significant land remains for development or redevelopment, however,
the pace of expansion seen in prior years in not expected to resume in the near
term. In 2008, the Authority annexed an additional 497 acres. This annexation
does not represent significant taxable value potential as it largely encompasses
right of way and parkland.
As with similar entities, the top ten taxpayers (eight of which are
multi-family) comprise a highly concentrated 48% of 2010 incremental values. The
Authority's largest taxpayer is a high rise apartment building (9.5% of
incremental value) completed in 2008 and originally intended to be marketed as a
condominium building. Occupancy reportedly remains low at 65% and could impact
upon future valuations. The Authority's second largest taxpayer (5.7% of
incremental value) is the sister condo property and was bought out of bankruptcy
shortly before foreclosure was expected. The marketing of the condominium
properties is ongoing.
TAX INCREMENT REVENUES PROVIDED BY CITY OF HOUSTON AND HOUSTON ISD; HARRIS
COUNTY PARTICIPATION HAS TERMINATED
The redevelopment authority pledges and receives from each participant taxes
that they collect on the incremental value of properties located within the
zone. The participants include the City of Houston (Aa2/stable) and the Houston
Independent School District (HISD) (Aaa/stable). They have entered separated
interlocal agreements with the authority. While Harris County (GO rated Aaa) was
previously a participant, their participation has terminated as per the maximum
participation envisioned under the original agreement.
The city is a full participant in the zone, and all taxes collected on captured
appraised value within the zone at the current tax rate are remitted to the
authority net of a 5% administration fee. In fiscal 2010 revenues derived from
the City's increment represented 84% of pledged revenues.
HISD participation is based on actual incremental values is based on
a $6.40/$1,000 of captured valuation tax rate as of January 1, 2009 and
continuing through the duration of the agreement (December 2029). The agreement
with HISD, however, provides for two separate structures that limit the amount
to be remitted to the authority in any given year to the lesser of the limited
captured appraised value included in the project plan or the taxes collected
on actual incremental values. For all practical purposes, it is anticipated that
the revenues remitted annually will reflect the limited captured appraised
value. The value is now well beyond the cap providing some insulation to this
share of the revenue stream from declines in actual taxable values. In addition,
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 coverage without
district participation has been demonstrated, the possibility of HISD's reduced
participation in tax increment payments remains a credit uncertainty.
COVERAGE SIGNFICANTLY REDUCED BY CURRENT ISSUE; REMAINS SATISFACTORY
Fiscal 2010 increments provided a satisfactory 2.2 times coverage of maximum
annual debt service and 2.5 times coverage of annual average debt service.
Coverage declines, but remains adequate at 1.85 times of MADS when HISD's
contribution is excluded. Fiscal 2011 projected coverage is expected to be
modestly impacted by the declines in incremental value but approximate 2010
levels. No additional borrowing is currently envisioned. Reductions in coverage
caused by further declines in incremental values, further leveraging or changes
in participation levels could impact credit quality. Payout of outstanding debt
is slowed with the current issue to 47% retired in ten years.
ADEQUATE LEGAL PROVISIONS
The City created the Authority and appoints five of the seven board
members, with HISD and Harris County each appointing one member. City
approval is required for the district's annual budget, bond issuances, and
amendments to the Project Plan-which serves as the long range plan for the
district. Sufficient bondholder security is provided by an additional bond test
(ABT) which requires at least 1.35 times of average annual debt service based on
the appraisal district's estimated valuation or prior year actual pledged
revenues. The cash funded debt service reserve requirement is equivalent to
MADS. The indenture requires the City of Houston to transfer funds by June 30th
presuming the city has approved the district's budget. Absent budget
approval, the city is required to transfer these funds by August 1-30 days prior
to the September 1 debt service payment. The indenture does not require funds be
transferred directly to the trustee, instead requiring the district to
immediately upon receipt of increment revenues to transfer 12 months worth of
debt service and any debt service reserve deficiency directly to the trustee.
Reportedly, the city transfers the increments directly to the trustee who then
remits amounts in excess of debt service due in the forthcoming 12 months back
to the District.
System: Tax Increment District
Participants: City of Houston (84% of 2010 revenues) and Houston ISD
Incremental Full Value: $783M (TY 2010 Preliminary data, 5% remains uncertified)
TY09-TY10 Projected decline in incremental value: -4.7%
Captured tax increment concentration (top ten): 48%
District size: 1,712 (of which 1,215 acres are considered increment-producing)
Fiscal 2010 coverage MADS: 2.2x (excluding HISD: 1.85x)
WHAT COULD CHANGE THIS RATING UP:
--Taxbase growth and diversification
--Significant improvement in debt service coverage
WHAT COULD CHANGE THIS RATING DOWN:
--Significant declines in incremental value and/or coverage
--Change in HISD participation level
--Significant additional leveraging
OST/AC Redevelopment Authority's 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) and the issuer's
management and governance structure related to payment. These attributes
were compared against other issuers both within and outside of OST/AC
Redevelopment Authority's core peer group and OST/AC Redevelopment Authority's
ratings are believed to be comparable to ratings assigned to other issuers
of similar credit risk.
Information sources used to prepare the credit rating are the following: parties
involved in the ratings, parties not involved in the ratings.
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
Journalists: (212) 553-0376
Research Clients: (212) 553-1653
MOODY'S ASSIGNS Baa2 RATING TO OLD SPANISH TRAIL/ALMEDA CORRIDORS REDEVELOPMENT AUTHORITY'S $22M TAX INCREMENT CONTRACT REVENUE BONDS, SERIES 2010
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