DALLAS - Attempting to defy a declining economy and challenging markets, Tucson's Rio Nuevo downtown development district is issuing $78 million of debt to speed restoration of the city's core.
The district aims to get its first funds in hand by the end of the year as part of a plan that ultimately calls for more than $450 million of borrowing.
Institutional pricing comes today after a retail order period yesterday.
Lead underwriter Piper Jaffray & Co. is working with co-manager Stone & Youngberg LLC on the deal, with RBC Capital Markets as financial adviser.
The subordinate-lien revenue bonds are backed by the district's incremental excise tax revenue. The tax pledge is subordinate to an existing obligation of the district and any senior-lien bonds that may be issued. The bonds are also payable from appropriated amounts made under certain limited circumstances by the city of Tucson through an intergovernmental agreement with the district.
The bonds earned ratings of A2 from Moody's Investors Service and A-minus from Fitch Ratings.
A previous issue of $5.8 million for renovation of the downtown Fox Theater, part of the Rio Nuevo district, was upgraded this year to A-plus from BBB by Standard & Poor's. The taxable bonds were issued by the Tucson Industrial Development Authority.
Proceeds from this week's sale will finance 14 downtown projects, including $10 million for design work for a new Tucson Arena. The issue will be the first of six authorized by the City Council totaling $453 million of borrowing through 2014. A second issue of $112 million is expected next summer. Two more bond sales are likely to follow in 2010, with two final offerings expected in 2014, according to Rio Nuevo director Greg Shelko.
First in line for the bond proceeds are the University of Arizona Science, Center/Arizona State Museum, Arizona History Museum, Tucson Children's Museum, a Depot Plaza parking garage, and a Clark Street freeway underpass.
Tucson Arena funding, originally set for 2009, was moved forward to the first bond issue because officials expect to have a design-build team in place by mid-January to start design work.
Tucson voters approved the Rio Nuevo district in 1999, and the financing was authorized by the Arizona Legislature in 2003. Voters approved an extension of the program in 2006. Some lawmakers have complained about what they see as the city's inaction on the project.
In August, district officials said that earlier estimates of $500 million in sales tax revenue through 2025 - the life of the district - were too conservative. Actual collections will be closer to $961 million, they say.
However, since then, the economy has worsened, particularly in Arizona, which has been hard hit by the housing crisis.
"Despite the recent decline in excise tax revenues, estimated debt service coverage on the Series 2008 bonds is adequate," Fitch analysts said. "Projected fiscal 2009 pledged revenues produce roughly 1.5 times maximum annual debt service coverage. The current weakness in overall economic conditions and retail activity in the district underscore the importance from a credit standpoint of the city's commitment to include an appropriation request in the annual budget as needed."
Rating considerations include "the age and occupancy level of one of the two retail malls that generate the majority of excise tax revenues in the district," Fitch said.
Projects already completed using the tax increment financing include renovation of the Fox and Rialto theaters, the construction of El Presidio San Agustin del Tucson, the Tucson Convention Center box office, and a series of landscaping and environmental projects.
A four-mile-long modern streetcar is expected to arrive in 2011, connecting the University of Arizona and its Health Sciences Center to the Mercado District at Menlo and other attractions. The streetcar will be funded separately.
Tucson carries general obligation bond ratings of AA from Standard & Poor's and Fitch and Aa3 from Moody's.
With an estimated population of 518,956, Tucson's metropolitan area is home to 946,362 people, according to the 2006 census. As home to the University of Arizona's flagship campus, the city has a large student population.
Like other cities in Arizona, Tucson has seen the growth of its residential base slow from its peak in 2001, when 3,800 single-family home permits were recorded. Fewer than 1,400 new housing starts were reported in 2007, and the city is on pace to record fewer than 1,000 housing permits for 2008, according to Fitch.
"While the slowdown is a concern, Fitch believes the comparatively modest rates of home price appreciation have helped maintain a measure of price stability in Tucson's housing market compared with the Phoenix metropolitan area," analysts wrote. "While foreclosure and delinquency rates in Tucson are up sharply from historical averages, they remain below U.S. averages for the most recent reporting period."
Tucson is expected to draw about $12 million from its operating reserves this year. The reduction is due primarily to a decline in sales tax receipts and development-related revenues as well as less state-shared sales tax revenues.
For fiscal 2009, officials closed a large budget gap through various cost-saving measures, including the elimination of vacant city positions, consolidation of services, and no increase in salaries. However, because of weak economic conditions, Tucson officials now expect fiscal 2009 revenues to come in below original budget projections and they anticipate the general fund will report another decline in reserves of approximately $4.5 million.
"Despite the city's weakening financial profile, Fitch believes that due to the size of Tucson's operating budget ($470 million for fiscal 2009) any annual appropriation for debt service on the series 2008 would be manageable," analysts wrote.
