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MOODY'S ASSIGNS Baa2 RATING TO OLD SPANISH TRAIL/ALMEDA CORRIDORS REDEVELOPMENT AUTHORITY'S $22M TAX INCREMENT CONTRACT REVENUE BONDS, SERIES 2010

18 Oct 2010

AFFECTS $27.9M IN PARITY DEBT, INCLUDING THE CURRENT ISSUE

Municipality
TX

Moody's Rating

ISSUE

RATING

Tax Increment Contract Revenue Bonds, Series 2010

Baa2

  Sale Amount

$22,000,000

  Expected Sale Date

10/28/10

  Rating Description

Tax Increment Contract Revenue Bonds

 

Opinion

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.

RATING RATIONALE

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.

KEY STATISTICS:

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.

REGULATORY DISCLOSURES

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.

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

Michelle Smithen
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 Baa2 RATING TO OLD SPANISH TRAIL/ALMEDA CORRIDORS REDEVELOPMENT AUTHORITY'S $22M TAX INCREMENT CONTRACT REVENUE BONDS, SERIES 2010
No Related Data.
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