Fitch Rates Denver Urban Renewal Auth (Colorado) Sr. Tax Increment Bonds 'A-'; Outlook Stable

AUSTIN, Texas--(BUSINESS WIRE)--

Fitch Ratings assigns a rating of 'A-' to the following Denver Urban Renewal Authority (DURA), Colorado bonds:

--$174.6 million Stapleton senior tax increment revenue bonds, series 2013A-1.

The bonds are scheduled to price via negotiation during the week of March 25. The proceeds will be used to refund series 2008A-1 and 2008A-2 in their entirety with fixed rate bonds.

Fitch also upgrades to 'A-' from 'BBB+' DURA's outstanding Stapleton tax increment revenue bonds, series 2008A-1 and 2008A-2.

The Rating Outlook is Stable.

SECURITY

The bonds are obligations of DURA and secured by a senior pledge on incremental property and sales tax revenues collected only within the Stapleton redevelopment tax increment area.

KEY RATING DRIVERS

UPGRADE REFLECTS REDUCED VARIABLE RATE EXPOSURE: The upgrade to 'A-' reflects Fitch's expectation that DURA's variable rate exposure will be eliminated with the current offering.

TIF MILLAGE INCREASES BENEFIT COVERAGE: Recent voter-approved millage increases materially increase incremental property tax revenues and bolster Stapleton's ability to withstand slower growth scenarios.

SOLID FINANCIAL FLEXIBILITY: Existing taxable resources are generating incremental property and sales tax revenues that provide solid debt service coverage. Taxpayer concentration and high debt levels are evident but not unusual for tax increment financing TIF districts.

STRATEGIC LOCATION: The service area, Stapleton, is strategically located between downtown Denver and Denver International Airport. The diversity of development is another credit positive, with large retail and industrial sectors supplementing residential development.

PROMISING GROWTH PROSPECTS: Stapleton represents the city's only remaining large tract of developable land that includes a residential component. The completion of residential units grew considerably in 2012 following several years of slowed development.

ADVANCED URBAN DEVELOPMENT: The service area has attained an advanced level of infrastructure development and only a moderate amount of infrastructure costs remain for the short-to-medium term.

RATING SENSITIVITY

SIGNIFICANT AV AND SALES TAX DECLINES: Large and sustained declines in assessed value (AV) and sales tax receipts would reduce all-in debt service coverage and lead to negative rating pressure.

CREDIT PROFILE

LARGE AND DIVERSE DENVER-METRO REDEVELOPMENT AREA

The Stapleton redevelopment area was created for the purpose of assisting in the financing and construction of infrastructure improvements serving a portion of the former Stapleton International Airport. The redevelopment area is strategically located in close proximity to downtown Denver, major transportation corridors, and Denver International Airport. The development plan creates a mixed-use community that at full build-out is projected to include 12,000 housing units, 13 million square feet of commercial and retail space, and 1,100 acres of open space and parks on about 4,000 total acres.

Current development plans cover 2,000 acres of Stapleton's 2,935 developable acres. A fifth phase of development has been completed, with approximately 4,700 residential units, or 68% of the planned 7,391 units complete and occupied.

A regional shopping center and other retail are also in place, with industrial space built and occupied as well. Office construction is the district's most challenging sector, with the first major building completed in 2010.

The existing housing stock is diverse with home prices ranging from $150,000 to $1 million, which should prove advantageous in a better economic climate. The average price of new homes sold in 2012 was $433,000, reflecting the affluent nature of residents, and management reports minimal residential foreclosure activity in the service area.

The tax base is concentrated, though trending down favorably, with the top 10 taxpayers accounting for 33% of incremental value, down from 44% in 2010. These properties represent a mix of commercial and industrial properties. Forest City Stapleton (the developer) owns three properties within the largest 10 taxpayers, accounting for 12.7% of incremental value, including The Shops at Northfield, a regional mall. Occupancy at the mall is currently only 82.5% occupied, but retail performance of the mall greatly improved in 2012 with the completion of a key I-70 interchange that has enabled easier access, contributing to a large 22% hike in sales taxes that year.

SIGNIFICANT INFRASTRUCTURE INVESTMENT

Over $500 million in infrastructure has been put in place to date comprising the bulk of such needs for near-term development, funded largely by the DURA tax increment bonds, excess tax increment revenues, and contributions from other metro districts located within the redevelopment area.

DURA's additional bonds test requires 1.25x coverage, which Fitch views as below average, based on historical AV for the past two years. Alternatively, a 1.35x coverage test can be used based on an independent consultant's AV projections over the subsequent three years. Credit concerns are somewhat lessened by the fact no new money debt is anticipated as limited infrastructure costs remain.

TAX-BASE GROWTH PROJECTIONS SUPPORTED BY DEVELOPMENT ACTIVITY

The redevelopment area's AV increased at a strong compound annual growth rate (CAGR) of 14% from 2005-2011. Growth was much more moderate in 2009 and 2010 due to a steep building slowdown and declined by 7.8% for 2012 which was a reassessment year. Due entirely to new growth, AV rose by 6.2% in 2013. Fitch notes Stapleton's overall maturity is reflected in its high incremental value (IV) to base year ratio of 7.7x, which mitigates the effect of falling AV on coverage levels.

The district projects aggressive AV growth (8%-11%) over the next few years, based on a projection of building 400-450 homes per year along with considerable development of office and industrial facilities. Fitch notes the pace of residential construction within Stapleton improved significantly in 2012 with 508 homes built and occupied, compared to recession period completions of 185-328.

HIGH VARIABLE RATE DEBT EXPOSURE ELIMINATED; RAPID PAY-OUT

The current offering will refund all outstanding senior lien debt which is also entirely in the form of variable rate demand obligations (VRDO). The termination of the four swaps associated with the refunded bonds totals $40 million, part of which will be funded with cash made available by a reduced debt service reserve fund (DSRF) and expected premium from the sale of the new bonds.

Previously equal to the standard DSRF requirements, the 2013A-1 bonds will carry a $9.3 million DSRF, equal to 47% of maximum annual debt service (MADS). Given the advanced stage of development, ample debt service coverage, and ability to withstand various stress scenarios, Fitch considers the reduced DSRF requirement a credit neutral. Notably, the principal amortization of both senior and subordinate lien bonds is now rapid, with 77% retired in 10 years.

HIGH BUT MANAGEABLE DEBT BURDEN

The debt burden is high but not atypical for TIF districts and should decline as development proceeds. In addition to the 2013 senior bonds, DURA has $97.9 million in outstanding Stapleton fixed-rate subordinate bonds which Fitch does not rate. In the event of default on any subordinate bonds, there is no acceleration of senior debt or other adverse effects to senior bondholders.

Coverage of senior lien debt service is good, but drops to average levels when including both senior and subordinate obligations. MADS coverage of senior lien bonds based on actual 2011 net revenues is 1.68x, and improves to 1.83x by unaudited 2012 figures due to surging sales taxes which more than offset the previously noted 7.8% decline in AV.

LARGE VOTER-APPROVED MILL LEVY INCREASES

The mill rates imposed by the redevelopment area's principal participants rose by a large 18% in 2013, benefiting DURA's debt service coverage. In November 2012, voters approved a permanent 4.86 fixed mill override for Denver School District No, 1 (GO bonds rated 'AA+' by Fitch). Concurrently, voters also approved a permanent waiver of TABOR property tax revenue limitations for Denver (GO bonds rated 'AAA' by Fitch), allowing the city to raise its O&M mill rate by a large 3.55 mills or 36% in 2013. The combined millage hikes, plus new growth, resulted in a large tax increment property tax levy increase of 19.8% in 2013. As a result, tax increment property taxes, which accounted for 57.8% of combined increment revenues in 2012, will comprise a larger portion of pledged revenues starting in 2013.

FITCH STRESS TESTS

Due to the large increase in 2013 property tax levies, when combined with unaudited 2012 sales tax revenues, MADS coverage on the senior lien bonds remains close to 1.9x under a stress test that reduces both incremental property and sales tax by 10% followed by flat growth. Including the unrated senior subordinate bonds, MADS coverage is still adequate at 1.21x. While Fitch views the district's development assumptions as optimistic given the current lending climate, this coverage level is adequate.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, Zillow.com, National Association of Realtors,

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 14, 2012);

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

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