lcec s&p rating on hot-tax bonds

7/31/2019 LCEC S&P Rating on HOT-Tax Bonds

1/5

Summary:

Irving, Texas; Miscellaneous TaxPrimary Credit Analyst:

Sarah Smaardyk, Dallas (1) 214-871-1428; [email protected]

Secondary Contact:

Horacio Aldrete-Sanchez, Dallas (1) 214-871-1426; [email protected]

Table Of Contents

Rationale

Outlook

Related Criteria And Research

May 30, 2012

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2/5

Summary:

Irving, Texas; Miscellaneous TaxCredit Profile

US$143.66 mil spl tax rev bnds ser 2012A due 08/15/2042Long Term Rating B/Stable New

US$70.0 mil spl rev imp bnds ser 2012B due 08/15/2042

Long Term Rating B/Stable New

US$33.215 mil spl rev rfdg bnds ser 2012B-1 due 08/15/2042

Long Term Rating B/Stable New

Irving Misc Tax

Long Term Rating BBB+/Watch Neg On CreditWatch Negative

RationaleStandard & Poor's Ratings Services assigned its 'B' long-term rating to Irving, Texas' series 2012A special tax

revenue bonds, series 2012B special revenue improvement bonds, and series 2012B-1 special revenue refunding

bonds. We understand that the 2011 occupancy tax revenue bonds will be refunded as part of the series 2012B

special revenue refunding bonds. At this time, Standard & Poor's has placed the 'BBB+' rating on the series 2011

bonds on CreditWatch with negative implications due to the uncertainty associated with the sale of the series

2012B-1 special revenue refunding bonds. Once the series 2011 bonds have been refunded, we will withdraw the

rating on those bonds.

The 'B' rating reflects our view of:

The series 2012 bonds' lack of an additional bonds test, which could drastically reduce debt service coverage

should the city decide to issue additional bonds;

The historical cyclicality associated with the pledged revenue stream, which has experienced significant declines

during previous economic recessions;

Very weak coverage of projected maximum annual debt service (MADS), and this assumes annual revenue

increases and general fund support from the city for some outstanding hotel-tax supported debt.

Likelihood that the city's 2% hotel occupancy tax (HOT) revenues could not alone support the series 2009

certificates of obligation, which would require the city to raise its pledged back up ad valorem tax rate by 8.5

cents; and

Inclusion no, this is a developer commitment, separate of the city's bond issues of $80 million from The Las

Colinas Group; if this amount is not received, it could cause the city to issue additional debt.

The 2012 bonds are secured by a first lien pledge on a 9% HOT. City officials indicate they will use proceeds from

the series 2012A and 2012B bonds to construct an entertainment center and related infrastructure. They anticipate

using the series 2012B-1 bonds to refund the series 2011 hotel occupancy revenue bonds, which were privately

placed with the Bank of America. Under the series 2011 agreement with the Bank of America, the bank has to

approve the issuance of any additional debt back by hotel occupancy tax revenues. We understand that the city

plans to refund its 2011 bonds with the proceeds from the series 2012B special revenue refunding bonds. Once the

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series 2011 bonds have been refunded, we will withdraw the rating on the series 2011 bonds.

Irving, with a population of 213,700, is centrally located in the Dallas-Fort Worth metroplex, adjacent to

Dallas-Fort Worth International Airport, which has fueled its development as a manufacturing and distribution

center. Irving's Las Colinas is home to several international corporate headquarters, including Exxon Mobil,

Kimberly-Clark, Commercial Metals, and Fluor Corp.

The city is home to a broad base of hotels that offer an estimated 11,428 rooms; the average occupancy rate was

65% in fiscal year 2011, up from 59% in 2010. The average daily room rate, which is a better indicator of revenue

stability, has increased by approximately $2.30 to $86.54 in 2011 compared to 2010.

The city experienced a 15.5% increase in pledged revenues in fiscal 2011; a significant portion is attributable to

Super Bowl XLV, which was held on Feb. 6, 2011 and brought pledged revenues to $18.2 million. Excluding fiscal

year 2012 projections, revenues have increased by 1.8% annually over the past five years. In general, hotel tax

revenues have exhibited a relatively strong cyclicality, declining rather significantly during periods of economic

recession, making year-to-year predictions difficult. Although city officials originally projected a 6% increase in

pledged revenues for fiscal year 2012 from 2011 revenues of $18.2 million, the city now estimates that pledged

revenues will decline by 5.7%, or $1.03 million, in fiscal year 2012 to $17.2 million.

The HOT revenues are pledged on a prior lien basis to the city's series 2009 certificates of obligation. As additional

security for the certificates, the city pledged its limited ad valorem taxing authority to the series 2009 certificates.

Based on fiscal year 2011 audited figures, the 2% HOT produced just 0.65x coverage, which was insufficient to

cover annual debt service payments on the series 2009 certificates. The revenue projections considered by the city in

the funding of the series 2012A, 2012B, and 2012B-1 bonds are based on the assumption that the city would fully

support the series 2009 certificates with ad valorem tax revenues, thus effectively freeing the revenues from the 2%

HOT to be used for repayment on the series 2012 bonds. According to city officials, if the city decides to fully

support the debt service payments on the series 2009 certificates with ad valorem taxes, it would require a tax rate

increase of 8.5 cents per $100 of assessed value, which we believe may pose a significant fiscal and politicalchallenge.

The audited fiscal year 2011 revenues derived from the entire 9% HOT provided coverage of all outstanding parity

debt that we believe is weak: 0.96x of projected 2013 debt service. Coverage of MADS (which occurs in 2039)

based on fiscal year 2011 revenues is very weak in our view, at 0.5x. Even if the debt service from the city's series

2009 certificates of obligation is excluded, coverage of MADS on the series 2012A, 2012B, and 2012B-1 bonds is

weak at 0.78x in fiscal year 2039. As illustrated in the coverage calculations above, the ability of the pledged

revenues to cover future debt service payments is predicated on consistent future growth. A forecast presented to us

by city officials estimates consistent future annual growth in pledged revenues of 1.5%, following a projected 7.5%

growth in fiscal year 2012, which we believe is overly optimistic, based on the city's current estimate of a 5.7%

decline, and inconsistent with historical growth patterns in the city and overall in our universe of rated hotel

tax-secured bonds. While it is reasonable to expect that, on average, there will be future growth in the city's HOT

collections during the next 30 years, the forecast on which the bonds are constructed does not reflect, in our view,

the volatility of the revenue stream. We believe that the volatility inherent to the pledged revenues could result in

insufficient coverage of debt service in a particular year, even if over the longer term the average annual growth rate

in the forecast is met.


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Summary: Irving, Texas; Miscellaneous Tax


4/5

We believe that the legal features outlined in the ordinances and the preliminary official statement do not include

some of the legal features that are generally found in higher-rated HOT revenue bonds. While management has

represented that it may consider the issuance of additional bonds secured by the same pledged revenues, no

additional parity bonds coverage requirement exists. The city has established debt service requirements for the series

2012A and 2012B bonds, which will be an amount equal to the least of MADS, 1.25x average annual debt service,

or 10% of PAR. Combined with a back-loaded debt service schedule, this also creates future refinancing risk shouldthe pledged revenues experience economic fluctuation or if growth forecasts do not materialize as projected.

At this time, the city does not plan to issue additional debt within the next 12 to 24 months.

Outlook

The stable outlook reflects our expectation that, while the pledged revenues will not provide adequate debt service

coverage, the city will need to rely on property taxes to make payments on the series 2009 certificates of obligation.

In addition, the rating would be pressured if the city were to issue additional debt, which could further weaken debt

service coverage. We could raise the rating within the two-year outlook parameter if debt service coverage improved

significantly, the pledged revenues could support the series 2009 certificates of obligation, and the legal aspects of

the bond issue were strengthened. Conversely, we could lower the rating if the city were to issue additional debt,

further weakening debt service coverage, or if the developer were to withdraw its support of the project or fail to

make payment(s) in a full and timely manner.

Related Criteria And Research

USPF Criteria: Special Tax Bonds, June 13, 2007

Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at

www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's publicWeb site at www.standardandpoors.com. Use the Ratings search box located in the left column.

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Summary: Irving, Texas; Miscellaneous Tax


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lcec s&p rating on hot-tax bonds

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