Rating Action: Moody's downgrades Washington State Convention Center PFD's (WA) senior lien lodging tax bonds to Baa1 and sub lien to Baa3; outlook negative
Global Credit Research - 08 Dec 2020
New York, December 08, 2020 -- Moody's Investors Service has downgraded the Washington State Convention Center Public Facilities District's senior lien lodging tax bonds to Baa1 from A1 and downgraded the subordinate lien lodging tax bonds to Baa3 from A3, respectively. The outlook remains negative. The downgrades and negative outlook affect $1.3 billion in debt outstanding.
The downgrade of the PFD's senior and subordinate lien lodging tax bonds to Baa1 and Baa3, respectively, is driven by weaker than expected lodging tax revenue following the outbreak of the coronavirus pandemic. Current lodging tax collections are well-below similarly pledged obligations across the nation and will not be sufficient to cover the PFD's January 2021 debt service payment, though we expect bondholders will be paid on time and in full due to the PFD's use of unrestricted cash on hand as well as state deficiency loans. Absent a debt restructuring or extraordinary support from the State of Washington, King County or the City of Seattle, we expect debt service coverage from ongoing lodging tax collections to be less than sum sufficient in the near-term, with debt service satisfied additionally by unrestricted reserves, state deficiency loans and possibly the debt service reserve.
Healthy and growing pledged revenue collapsed in the early months of the pandemic as business and leisure travel to the Seattle metro area largely ceased. Although we have seen some indications of recovery, improvements substantially lag other visitor markets nationally and will likely continue to struggle in the coming months. Continued widespread coronavirus case growth and elevated unemployment levels will likely challenge a rapid recovery through next spring.
The multi-notch downgrades also reflect the substantial narrowing of unrestricted reserves available for debt service. Although the PFD maintains substantial unrestricted reserves, much of it remains earmarked to complete the PFD's capital program plans; management currently anticipates having sufficient unrestricted cash to cover debt service shortfalls from underperforming pledged revenues in calendar year 2021. The district will continue to use the additional lodging tax revenue to provide incremental financial flexibility in the near term, including to cover debt service. The district estimates it may need upwards of $350 million in additional funds to complete ongoing capital projects, with additional funding needed within the next six months to prevent meaningful stoppage on current construction activity.
The two notch distinction between the Baa1-rated senior lien and Baa3-rated subordinate lien bonds reflects the greater risk exposure of the subordinate lien bonds in the flow of funds. Additionally, the additional bonds test for the senior lien is higher at 1.75x compared to the 1.15x of the subordinate lien (after 2029 with the sunset of the additional lodging tax; currently the subordinate lien ABT is 1.25x).
The outbreak of the coronavirus pandemic and its detrimental impact on the PFD's credit profile is a social risk under our ESG framework. The PFD's response, including the utilization of unrestricted reserves, is a governance consideration under that framework, as well as any potential support from the City of Seattle, King County or the State of Washington.
The rating outlook remains negative. Despite recent positive news of vaccine development, we expect a slow recovery in the travel, leisure and hospital sector in general and for the Puget Sound region, in particular. Pledged revenue trends will continue to fall well-below historic levels, and the additional borrowing to complete the PFD's capital program will likely constrain its options regarding cash utilization.
FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS
- Rapid and sustained recovery in pledged revenue
- Improvement in debt service coverage
FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS
- Pledged revenue recovery at our below our current expectations
- Material increase in borrowing beyond our current expectations
The bonds are secured by a pledge of hotel room taxes within the public facilities district, which is coterminous with King County (Aaa stable). A portion of the hotel taxes collected in the City of Seattle (Aaa stable) are pledged to the bonds but sunsets in 2029, and are returned to the state at the end of the year if not needed for debt service. Revenues from this portion of hotel taxes used for debt service constitute a loan from the state that must be repaid over time. The PFD began collecting a tax on facilities with fewer than 60 units within its boundaries in 2019; those revenues are distributed by formula.
The bonds are additionally secured by a common debt service reserve fund equal to one-year of maximum annual debt service. The DSRF is satisfied with a surety from AGM.
USE OF PROCEEDS Not applicable PROFILE
The Washington State Convention Center Public Facilities District is an independent municipal entity that operates the Washington State Convention Center, located in downtown Seattle (Aaa stable). The WSCC is a multi-use event, convention, exhibit, trade, show, meeting, and retail facility with over one million square feet of rentable and non-rentable space. In addition to convention-related business activities, the district has taxing authority within its boundaries, which are coterminous with King County (Aaa stable).
The principal methodology used in these ratings was US Public Finance Special Tax Methodology published in July 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1077147. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s) announced and described above.
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William Oh Lead Analyst Regional PFG West Moody's Investors Service, Inc. One Front Street Suite 1900 San Francisco 94111 US JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Gera McGuire Additional Contact Regional PFG Dallas JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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