Fitch Affirms Oklahoma Devel. Fin Auth Goodyear & Michelin Project Bonds at ‘AA-‘
By Business Wire News
Fitch Ratings affirms the ‘AA-‘ ratings on the following Oklahoma Development Finance Authority (ODFA) bonds:
–$10.725 million in outstanding industrial development taxable revenue bonds, series 2004 (Goodyear Project);
–$7.575 million in outstanding industrial development taxable revenue bonds, series 2004 (Michelin Project).
The Ratings Outlook is Stable.
Ultimate bond security and basis for the rating is an allocation of statewide corporate income taxes (CIT) that back-up state personal income taxes withheld from the benefitted companies (Goodyear and Michelin) and are used to pay debt service.
KEY RATING DRIVERS
AMPLE COVERAGE FROM PLEDGED CORPORATE INCOME TAXES: The ‘AA-‘ ratings reflect the strong back-up security provided by the state’s pledge to draw upon statewide corporate income taxes (CIT) for these bond issues should first-tier pledged revenues prove insufficient to cover debt service. To date, no appropriations of CIT have been required. The CIT has shown significant volatility over time, but ample coverage of debt service requirements (57x from 2014 collections) offsets this concern.
SOLID COVERAGE OF DEBT SERVICE FROM EMPLOYEE WITHHOLDINGS: Employee withholdings at Goodyear’s Lawton, OK manufacturing facility are estimated to have covered the Goodyear bond’s debt service by a solid 1.71x in fiscal 2014. Employee withholdings at Michelin’s Ardmore, OK manufacturing facility are estimated to have covered the Michelin bond’s debt service by a comfortable 1.22x in fiscal 2014.
ADEQUATE NOTIFICATION AND TIMING MECHANISMS: The ODFA is required to certify sufficient amounts in the revenue account prior to a debt service payment date. Notification procedures provide sufficient timing to allocate the CIT should a funding deficiency in the first-tier pledged revenues occur.
STATE OVERSIGHT: The bonds benefit from the state’s strong fiscal oversight, which ensures sound monitoring of the revenue collection and payment processes for debt service requirements.
The ratings are sensitive to statutory changes that would notably reduce coverage from pledged CIT collections.
The ‘AA-‘ rating reflects the security provided by the state’s pledge to draw on the statewide CIT for payment of these bonds, if the intended sources of payment are insufficient. Required funding for debt service from first-tier pledged revenues is determined six months prior to a debt service payment date and the first-received employee personal income tax withholdings are allocated for debt service on each respective bond issue. Procedurally, the trustee would notify ODFA 90 days prior to a debt service payment date if there are insufficient funds in the respective revenue accounts. The requirement that the trustee must transfer funds for debt service five business days prior to a payment date provides sufficient time to allocate the CIT to the bonds, ensuring that debt service is paid on time. The state’s credit enhancement reserve fund provides a policy fulfilling the reserve fund requirement equal to 50% of maximum annual debt service (MADS).
The bonds were issued to encourage job creation, with proceeds providing funding for expansion of two tire manufacturing facilities. Goodyear completed a $250 million expansion project at a 2,600-employee tire manufacturing facility in Lawton. Final maturity of these bonds is July 1, 2017 with annual debt service around $3.9 million. For Michelin, bond proceeds contributed funding toward a $202 million expansion project at an 1,800-employee Michelin tire manufacturing facility in Ardmore. Final maturity of these bonds is July 1, 2017 with annual debt service around $3.2 million. Both manufacturers have also entered into additional financing arrangements through ODFA supported by employee withholdings that are subordinate to these bonds.
The intended source for bond repayments are employee tax withholdings, which in fiscal 2014 covered annual debt service and MADS on the Goodyear issue by 1.71x and on the Michelin issue by 1.22x. Although coverage has declined since the bonds were originally issued in 2004, margins are still comfortable. The companies are to be notified within 15 days of a deficiency in their accounts and have up to 60 days to cure the deficiency. If they do not make up for the deficiency, Oklahoma law allocates the CIT.
Oklahoma’s 6% CIT displays notable volatility, evidenced in fiscal 2013 receipts of $594 million that fell 31.3% to $408 million in fiscal 2014 as a result of reduced natural resource prices and an increase in the application of tax credits. Despite this decline, fiscal 2014 CIT covered MADS on the combined Goodyear and Michelin project bonds by approximately 57x, although the state could pledge this revenue to other bonds in the future. CIT collections in the current fiscal year through April 2015 have continued to decline, dropping 13.7% year-over-year from the same period in fiscal 2014 and falling 30.6% short of the state estimate. Tempering Fitch’s concerns regarding the declines, CIT collections year to date of $212.6 million cover MADS by a still-ample 30x. An April 2004 state Supreme Court decision declared the bonds constitutional but noted that the legislature could change the structure of the taxes, including the withholdings, dedicated to bond payment. To date, no appropriations of CIT have been required.
Additional information is available at ‘www.fitchratings.com‘.
Tax-Supported Rating Criteria (pub. 14 Aug 2012)
U.S. State Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)
George M. Stimola, +1-212-908-0239
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
Marcy Block, +1-212-908-0239
Karen Krop, +1-212-908-0661
Elizabeth Fogerty, +1-212-908-0526
Media Relations, New York