Turlock Finance Rating Downgraded

In the course of routine surveillance, Fitch Ratings has taken the following rating action on Turlock Public Financing Authority, CA’s tax allocation revenue bonds (TABs):  $3.2 million outstanding Turlock Public Financing Authority, CA TABs, series 1999 downgraded to ‘BBB+’ from ‘A-‘.

 
According to Turlock City Manager, Roy Wasden, "This will not have any impact on the City/Agency, its budgets or any projects.”
 
“This rating is solely for the 1999 Tax Allocation Revenue Bonds the proceeds of which were used for infrastructure improvements in the downtown area,” stated Wasden. “It does not affect any of the other outstanding bonds issued through the Turlock Public Financing Authority. While disappointing, Staff believes the reasons stated by Fitch for their actions are not unreasonable."
 
Fitch Ratings is an international ratings agency providing issuer and bond ratings, and research banks, corporations, sovereigns, structured and municipal finance.  Other communities in the valley that have recently had their ratings downgraded include:
 –  Modesto general obligation rating ‘AA-‘.  –The downgrade to ‘A+’
 –  Fresno revenue bonds dropped to A-minus from AA-minus and Fresno’s implied general obligation rating fell to A from AA
 –  Stockton’s issuer credit rating to A-minus from A. The city’s certificates of participation and lease revenue bonds fell to BBB+ from A-minus.
 
Each of these communities and Turlock fall in the Upper Medium and Lower Medium Grade risk level which still falls within a Stable Outlook for investors. Below is a chart of the ratings and how they compare to S&P and Moody’s and their corresponding risk:

Moody’s

S&P

Fitch

 

Long-term

Short-term

Long-term

Short-term

Long-term

Short-term

 

Aaa

P-1

AAA

A-1+

AAA

F1+

Prime

Aa1

AA+

AA+

High grade

Aa2

AA

AA

Aa3

AA-

AA-

A1

A+

A-1

A+

F1

Upper medium grade

A2

A

A

A3

P-2

A-

A-2

A-

F2

Baa1

BBB+

BBB+

Lower medium grade

Baa2

P-3

BBB

A-3

BBB

F3

Baa3

BBB-

BBB-

Ba1

Not prime

BB+

B

BB+

B

Non-investment grade
speculative

Ba2

BB

BB

Ba3

BB-

BB-

B1

B+

B+

Highly speculative

B2

B

B

B3

B-

B-

Caa1

CCC+

C

CCC

C

Substantial risks

Caa2

CCC

Extremely speculative

Caa3

CCC-

In default with little
prospect for recovery

Ca

CC

C

C

D

/

DDD

/

In default

/

DD

   

 

Turlock’s rating downgrade is based on significant multi-year assessed value (AV) declines coupled with additional parity debt issuance which reduces overall financial flexibility and annual debt service coverage.  Below are the details of the reasons for the rating downgrade:

 
KEY RATING DRIVERS

Reduced Debt Service Coverage: Annual senior bond debt service coverage has exceeded 3.0 times (x) the past three years, but fell to an estimated 1.79x in fiscal 2011 following the issuance of $15.3 million of parity debt in 2011 and cumulative annual AV decline of 14% between 2008 and 2011. Projected debt service coverage remains vulnerable to further AV declines and performs marginally under various stress tests.
 
Somewhat Concentrated Project Area: AV declines have resulted in increased project area concentration with the top 10 taxpayers comprising 20% of total AV in 2011 up from 14% in 1999 with a large agricultural and food processing component.
 
Adequate Legal Provisions: Additional parity debt issuances are required to meet a 1.25x maximum annual debt service (MADS) test from senior revenues.
 
Limited Additional Debt Issuance Expected: Following the debt issuance in 2011, it is highly unlikely that the authority will issue additional debt.
 
Legislative Changes: Recently approved legislation requiring annual payments to the state to continue to operate redevelopment agencies was not a material factor for this rating as it appears debt service would continue to be paid from net incremental revenues. The matter is being litigated, and in August 2011, the California Supreme Court issued a stay on agency debt issuance and required payments to the state until a ruling is made, currently expected in January 2012. Fitch will continue to monitor the situation.
 
SECURITY
 
The bonds are secured by a senior lien loan repayment from the Turlock Redevelopment Agency’s gross increment revenues from the project area net of any required senior set-aside and pass-through payments.
 
CREDIT PROFILE
 
Project Area:
 
The Turlock project area, formed in 1993 and amended in 1996, encompasses a total of 4,318 acres or 51% of the City of Turlock and areas within Stanislaus County. The project area includes the Turlock downtown area and other commercial, industrial and residential land uses as well as a portion of the Stanislaus Enterprise Zone which offers various state and local tax incentives. The composition of project area AV for 2011 was led by residential properties at 39% complemented by industrial at 33% and commercial at 25%. Steady annual tax base growth over the past decade slowed in the past three years to declines of 4% each in 2009 and 2010 and a decline of 7% in 2011 but the project area tax base remains a sizable $1.5 billion, compared to a base year value of $727 million. The top 10 taxpayers comprise 20% of the project area’s total AV in 2011 up from 14% in 1999 or a high 36.6% of IV in 2011 and include several agricultural/food processing facilities. Sensient Dehydrated Flavors Inc., which specializes in food colors, flavors and fragrances, completed a 227,000 square foot expansion to its facility within the project area in 2009 and comprises 4% of 2011 total AV. Pending fiscal 2011 valuation appeals total $124.5 million or 9% of total AV. Such appeals are projected to result in a modest $214,624 annual increment revenue loss based on historical success rates and are not expected to significantly impact coverage levels.
 
Coverage Ratios:
 
Annual pledged revenues (after set-asides and pass-throughs) declined through 2011 to around $5 million in fiscal 2011 but continue to provide adequate coverage of senior annual debt service at over 1.5x. Coverage declined from over 3.0x due to AV losses and the issuance of $15.3 million parity debt in 2011 which raised funds for a portion of a new $35 million public safety facility. Fitch stress tests indicate MADS coverage in fiscal 2012 of only 0.98x based on the loss of the top 10 taxpayers and zero AV growth. An additional Fitch stress which includes 100% loss of pending appeals and zero AV growth results in MADS coverage of 1.44x in fiscal 2012. An immediate AV decline of 18% would be required for MADS coverage to fall to 1.0x indicative of the continued vulnerability to further AV declines. No additional debt issuance is currently expected. Combined senior debt service ranges between $3 million and $3.3 million between fiscal 2012 and 2038. Redevelopment agency fund balances were sizeable at $25 million at fiscal 2009 year-end but were drawn upon in 2010 and 2011 to pay for capital projects and fund state required educational revenue augmentation fund payments of over $4 million for fiscal years 2010 and 2011 combined. Those payments were subordinate to senior debt service.
 
Economy:
 
The City of Turlock (population 71,181 in 2010) is 15 miles south of Modesto, CA along Highway 99 in Stanislaus County which is one of the most productive agricultural areas in the United States. Agricultural products include fruits, nuts, livestock and animal products. Leading city employers include Turlock Unified School Districts (2,120), Foster farms poultry processing (1,508) and Emanuel Medical Center (1,421). Steady tax base growth over the past decade slowed over the past three years and is expected to stabilize. City financial performance remains strong despite slowed revenues including property and sales taxes with an unreserved general fund balance of $19 million or 61% of expenditures for fiscal year 2010. The city general fund was reimbursed $4.5 million from the redevelopment agency fund in 2010 for design costs related to the public safety facility project. Given the limited overall economy, county unemployment rates remain well above state and national levels and most recently totaled 17.2% in June 2011. City unemployment rates track closer to the state averages. While the local cost of living is low, 2009 median household income indicators remain 17% below state levels and only 3% below national levels.
 
Additional information is available at www.fitchratings.com.
 
In addition to the sources of information identified in Fitch’s Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope and IHS Global Insight.

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