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MOODY'S ASSIGNS INITIAL Aa3 RATING TO SOUTHWESTERN ILLINOIS DEVELOPMENT AUTHORITY'S (IL) $91.3 MILLION LOCAL GOVERNMENT PROGRAM REVENUE BONDS (SOUTHWESTERN ILLINOIS FLOOD PREVENTION DISTRICT COUNCIL PROJECT), SERIES 2010A, SERIES 2010B, AND SERIES 2010C

30 Sep 2010

Southwestern Illinois Flood Prev.Dist.Council
Other Sectors
IL

Moody's Rating

ISSUE

RATING

Local Government Program Revenue Bonds, Series 2010A (Tax-Exempt)

Aa3

  Sale Amount

$60,900,000

  Expected Sale Date

11/03/10

  Rating Description

Sales and Use Tax

 

Taxable Local Governmet Program Revenue Bonds, Series 2010-B (BAB)

Aa3

  Sale Amount

$10,115,000

  Expected Sale Date

11/03/10

  Rating Description

Sales and Use Tax

 

Taxable Local Government Program Revenue Bonds, Series 2010-C (Recovery Zone Economic Development)

Aa3

  Sale Amount

$20,360,000

  Expected Sale Date

11/03/10

  Rating Description

Sales and Use Tax

 

Opinion

NEW YORK, Sep 30, 2010 -- Moody's Investors Service has assigned an initial Aa3 rating to the Southwestern Illinois Development Authority's (IL) $60.9 million Local Government Program Revenue Bonds (Southwestern IL Flood Prev. Dist. Council Project), Series 2010-A (Tax-Exempt), $10.1 million Taxable Local Government Program Revenue Bonds (Southwestern IL Flood Prev. Dist. Council Project), Series 2010B (Build America Bonds), and $20.4 million Taxable Local Government Program Revenue Bonds (Southwestern IL Flood Prev. Dist. Council Project), Series 2010C (Recovery Zone).

RATINGS RATIONALE

The bonds are secured by a 0.25% flood prevention retailers' occupation tax and a flood prevention service occupation tax imposed on the gross receipts of select taxable sales across Madison, Monroe, and St. Clair counties in Illinois. We note the distribution of the total sale amount between tax-exempt and taxable bonds is preliminary and may change at the time of sale depending on market conditions. Bond proceeds will finance emergency levee repair and flood protection from the Mississippi River across the three counties, as well as, fund a debt service reserve account. Assignment of the Aa3 rating reflects the council's sizeable tax base and diverse economy; adequate pro forma financial operations and debt service coverage bolstered by a dedicated revenue source; satisfactory legal provisions; and manageable debt profile with near-term borrowing plans.

SIZABLE TAX BASE SUPPORTED BY DIVERSE ECONOMY

We believe the council's sizeable tax base will remain stable and continue to experience long-term growth due to its favorable location within the St. Louis metro area, its diverse economy and with access to major transportation routes. The council's borders are coterminous the counties of Madison, Monroe (GOLT rated A1), and St. Clair (GO rated Aa2). The combined taxable valuation of the three counties has grown at an average 5.6% over the past five years, with full valuation currently standing at an ample $30.7 billion (56% from Madison, 36% from St. Clair, and 8% from Monroe). The economic base in the region is represented by a diverse mix of industrial and commercial users with significant manufacturing, education, health care, and government interests. Scott Air Force Base represents the largest employer in the region with approximately 14,150 employees. Officials report stability and continued investment in the base, which was twice on the Defense Base Closure and Realignment Commission (BRAC) list. Additional major employers in the region include U.S. Steel, Granite City Works (2,225 employees), Memorial Hospital (2,400 employees), and Southern Illinois University-Edwardsville (2,451 employees). Officials report that while employment levels within major employers in the region were impacted by the recession, these levels appear to be rebounding. U.S. Steel, Granite City Works laid off approximately 1,600 employees in late 2009, however has since rehired the majority of these positions. Unemployment rates across the three counties, though elevated, mirror state levels standing at 10.2% (Madison), 7.8% (Monroe), and 10.9% (St. Clair) in June 2010 as compared to the state's 8.7%, for the same period.

SATISFACTORY PRO FORMA FINANCIAL OPERATIONS; POTENTIAL FEMA DE-ACCREDITATION

The council is expected to maintain a satisfactory financial position through sales tax collections that are conservatively projected as sufficient to meet debt service coverage. The system is comprised of four separate local levee districts, which support operations and maintenance with local assessment and property tax levies. In addition, the U.S. Army Corps of Engineers owns and maintains one system. The council was created to support emergency repairs across the four local districts. To finance the project, a 0.25% dedicated sales tax was approved by the state legislature and implemented across Madison, Monroe, and St. Clair counties for a 25-year collection period or until all related debt obligations are defeased. The sales tax is subject to various exemptions including titled or registered property, food that is consumed off the premises where purchased, and various medical-related products, which represent approximately 80% of total taxed sales. Under 0% assumed growth in collections and a level debt service schedule, debt service coverage is projected to be 1.5 times (1.75 times with subsidies). We note these projections are based on a somewhat weak collection year (2009-2010) given the broader national economic downturn, which reduced sales tax receipt growth.

Notably, various factors remain uncertain, including the potential financial impact of the final confirmation of levee system de-accreditation. In 2007, the Federal Emergency Management Agency (FEMA) indicated that the Southwest Illinois system would be de-accredited with a large area behind the levees shown as unprotected under the Federal Flood Insurance Rate Maps. FEMA's warning prompted implementation of the current project. The estimated economic impact on homeowners and businesses across the three counties to obtain mandatory federal and private flood insurance should the levee system be de-accredited is approximately $50 million per year. In addition, the potential financial impact on the dedicated sales tax may result in downward rating pressure should declining collections narrow coverage. Officials are currently seeking legislative support to delay the mandatory flood insurance maps. We will continue to monitor the progress of this resolution and the potential rating impact as a part of ongoing credit reviews.

MANAGEABLE DEBT POSITION WITH NEAR-TERM BORROWING PLANS; SATISFACTORY LEGAL PROTECTIONS FOR BONDHOLDERS

We expect the flood prevention council to maintain a manageable debt position, despite future borrowing plans. Officials expect the total project to span five years and cost approximately $150 million. Favorably, between approximately $20 million and $30 million of this total represents contingency funds. Legal provisions include an additional bonds test of 1.5 times maximum annual debt service (MADS). As a result, officials expect future borrowing to be subordinate to the current offering. A debt service reserve is expected to be funded at closing equal to the lessor of 10% of par, maximum annual debt service net of subsidies, or 1.25 times average annual debt service. Officials expect additional borrowing in 2012 and 2014 to finalize levee improvements. Payout, though below average, meets the useful life of the assets with 30% paid out over ten years.

WHAT COULD CHANGE THE RATING - UP

- Substantial improvement in sales tax receipts that results in improved debt service coverage

WHAT COULD CHANGE THE RATING - DOWN

- Deterioration in sales tax receipts that results in debt service coverage falling below bondholder covenants

- Implementation of the new Federal Flood Insurance Rate Maps resulting in a pressured local economy

KEY STATISTICS

Population (Madison, Monroe, and St. Clair FY 2009): 565,310

Full Valuation (Madison, Monroe, and St. Clair FY 2009): $30.7 billion

Average Annual Growth (2004-2009): 5.6%

Pro-forma annual debt service coverage: 1.5 times (1.75 times with subsidy)

Payout (10 years): 30%

Post-Sale Sales Tax Debt Outstanding: $91.3 million

PRINCIPAL METHODOLOGY

The ratings on the SWIDA's Local Government Program Revenue Bonds (Southwestern Illinois Flood Prevention District Council Project) were 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 the City's core peer group and the Authority's rating is 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, public information, confidential and proprietary Moody's Investors Service's 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

Iliana Beltran
Analyst
Public Finance Group
Moody's Investors Service

Nora Wittstruck
Backup Analyst
Public Finance Group
Moody's Investors Service

Edward Damutz
Senior Credit Officer
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 INITIAL Aa3 RATING TO SOUTHWESTERN ILLINOIS DEVELOPMENT AUTHORITY'S (IL) $91.3 MILLION LOCAL GOVERNMENT PROGRAM REVENUE BONDS (SOUTHWESTERN ILLINOIS FLOOD PREVENTION DISTRICT COUNCIL PROJECT), SERIES 2010A, SERIES 2010B, AND SERIES 2010C
No Related Data.
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