MRO Magazine

Fitch Affirms Chandler, AZ’s HURF Bonds at ‘AA’; Outlook Stable


January 13, 2016
By Business Wire News

AUSTIN, Texas

Fitch Ratings has affirmed the ‘AA’ on the $10.1 million highway user revenue bonds of Chandler, Arizona (Chandler or the city).

The Rating Outlook is Stable.

SECURITY

The bonds are secured by a first lien on revenues derived by the city from highway user taxes, including all taxes, fees, and charges collected by the state and returned to the city for street and highway purposes as proscribed by law.

KEY RATING DRIVERS

HEALTHY COVERAGE: Debt service coverage is strong at 3.3x in fiscal 2015, and the highway user revenue fund (HURF) maintains ample liquidity.

SOUND LEGAL PROTECTIONS: The additional bonds test requires pledged revenues to cover maximum annual debt service (MADS) 1.5x, and if projected MADS coverage is less than 2.0x the proposed bonds must be rated ‘A’ or higher by at least one nationally recognized rating agency.

PLEDGED REVENUE GROWTH: A trend of pledged revenue growth reflects the return of local and state-wide economic recovery.

NO ADDITIONAL LEVERAGING: The city has no near-term borrowing plans for highway user tax revenues.

RATING SENSITIVITIES

COVERAGE ADEQUACY: The rating is based on sound debt service coverage. A significant coverage decline, although not expected, could pressure the current rating.

CREDIT PROFILE

Chandler occupies 70 square miles in southeastern Maricopa County with a 2015 population of approximately 247,552.

PLEDGED REVENUES STABILIZE; COVERAGE REMAINS SOUND

Highway user tax revenues consist of motor vehicle fuel taxes, motor vehicle registration fees, motor vehicle licenses taxes, motor carrier fees, motor vehicle operator’s license fees, and other miscellaneous fees and revenues. Highway user tax revenues are collected by the state and deposited into the state highway user fund until distributed.

Arizona cities and towns receive 27.5% of highway user tax distributions. One half is distributed to cities and towns on the basis of population in proportion to all cities and towns in the state. The remaining half is distributed, first, on the basis of county origin of sales of motor vehicle fuels within the state, and second, to cities and counties on the basis of population in proportion to all cities and towns in the county. Arizona cities with populations exceeding 300,000 also receive a 3% allocation for certain street and highway purposes.

The Arizona state legislature retains the authority to alter the type and/or rate of fees that are deposited into the state highway user fund, as well as the allocation of such monies between state purposes and the distribution to cities, towns and counties. The legislature has made such alterations during recent legislative sessions, resulting in a reported cumulative loss to the city’s pledged revenues of approximately $5 million between fiscal 2009 and fiscal 2014. Similarly to other regional municipalities, the city does not expect the state to divert near term HURF monies based on improving economic conditions and extensive municipal lobbying efforts.

Fiscal 2015 pledged revenues of $14.6 million reflect three years of average 7.4% growth following a decline of 28% between fiscal 2007 and 2012. Using audited fiscal 2015 revenue, MADS coverage is 3.91x, and a stress test reducing revenues by 28% from the fiscal 2015 total still generates sound coverage of 2.81x.

All street and highway user revenue bonds outstanding mature by 2020. The city’s forecast conservatively projects pledged revenues of $14 million for fiscal 2016 and beyond, adequate to fund the current capital and maintenance requirements, focused on street repaving. There are no immediate issuance plans.

SOUND LEGAL PROVISIONS

Legal provisions provide sound bondholder protections. They include an additional bonds test of 1.5x MADS, and if projected MADS coverage is less than 2.0x the proposed bonds must be rated ‘A’ or higher by at least one nationally recognized rating agency. In addition to debt service payments, highway user tax revenues are used for capital projects and for staffing, maintenance and contractual expenses related to Chandler streets and highways.

EXPANDING LOCAL ECONOMY ANCHORED IN TECHNOLOGY

Chandler’s population has more than doubled since 1990, reflecting regional growth and the city’s success in attracting and retaining top technology, manufacturing, advanced business and health services. Anchored by Intel Corporation, top employers represent technology, manufacturing, financial, health care, and telecommunication interests.

Fiscal 2016 market value of $25 billion reflects two consecutive years of strong 9.5% annual growth. The city conservatively projects modest tax base growth over the medium term.

Additional information is available at ‘www.fitchratings.com‘.

Fitch recently published an exposure draft of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015). The draft includes a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to less than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published by the end of the first quarter of 2016. Once approved, the criteria will be applied immediately to any new issue and surveillance rating review. Fitch anticipates the criteria to be applied to all ratings that fall under the criteria within a 12-month period from the final approval date.

In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from CreditScope, IHS Global Insight, and Zillow Group.

Applicable Criteria

Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869942

Tax-Supported Rating Criteria (pub. 14 Aug 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=997814

Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=997814

Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY’S PUBLIC WEBSITE ‘WWW.FITCHRATINGS.COM‘. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE ‘CODE OF CONDUCT’ SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Fitch Ratings
Primary Analyst:
Rebecca Meyer, +1-512-215-3733
Director
Fitch Ratings, Inc.
111 Congress Ave., Suite 2010
Austin, TX 78701
or
Secondary Analyst:
Steve Murray, +1-512-215-3729
Senior Director
or
Committee Chairperson:
Karen Ribble, +1-415-732-5611
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
New York
elizabeth.fogerty@fitchratings.com