BRADENTON, Fla. — Orlando, Fla., next week expects to price its second round of direct-subsidy Build America Bonds using tax-increment financing after being the first to successfully use such a structure last fall.
The $75.8 million offering by the city’s Community Redevelopment Agency provides some of the funding to continue work on a long-planned $425 million performing arts center that is now advancing in a staged approach because of the soured economy.
The CRA transaction, being offered to retail Monday and institutional investors Tuesday, is expected to include $4.6 million of tax-exempt Series 2010A serial TIF bonds maturing in 2014-2018, and $71.2 million of taxable Series 2010B BABs with serial bonds maturing in 2019-2025 and two term bonds in 2013 and 2040.
The deal is structured to wrap around the first tranche of arts center TIF bonds sold last year to produce level debt service over the 30-year life of the bonds, according to Orlando Treasurer Christopher McCullion.
Like last year’s transaction, which closed in September, the deal selling next week will not be insured because it is not economically feasible, McCullion said.
But next week’s deal is being sold with BABs again because the 35% federal subsidy program worked well last year.
“We were very happy with the sale in September, particularly because the BAB option was available to us,” McCullion said.
The $51 million of BABs associated with the 2009 deal provided the CRA with an 8.5% savings on debt service over the life of the bonds compared to a pure tax-exempt offering, he said.
The 2010 bonds are rated A by Fitch Ratings, A2 by Moody’s Investors Service, and A by Standard & Poor’s.
Fitch’s rating represents a downgrade from A-plus, including the rating on $71.4 million of outstanding TIF bonds, but the agency also revised the outlook to stable from negative.
On Monday, Fitch issued a brief statement saying it planned to change the Orlando TIF rating back to A-plus, with a stable outlook, by recalibrating credit ratings on April 30.
Fitch said the downgrade reflected the decrease in debt-service coverage from pledged revenues as well as potential future tax base declines to an estimated 2.4 times maximum annual debt service for fiscal 2010, including the 35% BAB subsidy revenue, from 4.4 times in 2009.
But the outlook revision to stable reflected Fitch’s expectation that coverage would remain adequate for the new rating level since legal provisions are sound and limit additional debt issuance.
“I think the Fitch downgrade was, in a lot of ways, expected when we got a rating on the bonds we issued in September affirming the A-plus with a negative outlook,” McCullion said.
Removal of the negative outlook may be more important than the downgrade, the treasurer said.
“I think a negative outlook sometimes is more confusing,” McCullion said, noting that Fitch’s new rating now is at the same level as Moody’s and Standard & Poor’s. Moody’s has no outlook on Orlando’s TIF bonds, while Standard & Poor’s assigns a stable outlook.
The CRA has suffered from a decline in taxable assessed property values due to the economic downturn, but it is one of the oldest in Florida and covers 1,620 acres of real estate.
Fitch noted that fund balance levels are high as the redevelopment agency purposefully increased reserves over the past few years to keep up current operating spending levels as additional revenue was needed for debt service.
Unaudited fiscal 2009 results show $41.5 million in reserve, well above the CRA’s policy of maintaining a fund balance of between 15% and 25% of budgeted expenditures, according to Fitch.
While next week’s sale fulfills the CRA’s current obligation toward the performing arts center, the agency may be called upon again to sell completion bonds for what is now being called the first stage of the project.
As originally envisioned, the total project encompassed a 2,700-seat hall for large Broadway productions and concerts; a 1,700-seat acoustical theater to accommodate symphony, opera, and ballet; a 300-seat community theater and multipurpose facility for dance, music, and education; a public outdoor performance plaza for festivals and local functions to host up to 3,000 guests; and 10,000 square feet of educational facilities.
Because of the economic downturn, the project now is proceeding in phases. The current financing plan supports stage one, which will fund the 2,700-seat hall and the 300-seat community theater.
But even with a total of $129 million of financing from the city CRA, $88 million in donations raised by the nonprofit Orlando Performing Arts Center Corp., state grants and other revenue, another $31 million will be needed to complete stage one.
The need to take a phased approach to the performing arts center project is directly related to tourist tax revenue, which was going to cover a portion of its debt needs. But those collections have declined in the current recession and are not expected to recover for several years, McCullion said.
While the final decision as to how to raise the $31 million to complete stage one of the arts center has not been made, officials may consider issuing TIF bonds in 2013 if tourist taxes have not recovered to the point that they can be leveraged. And other revenue sources also will be considered if CRA debt-service coverage levels of 1.5 times, required by bond documents, could not be maintained.
“We will not put the city or the CRA in a position to build something we cannot afford to build,” McCullion said.
Bank of America Merrill Lynch is the book-runner for next week’s sale. Citi, Morgan Stanley, Rice Financial Products Co., and Wells Fargo Securities are also participating.
Public Resources Advisory Group Inc. is financial adviser. Bryant Miller Olive PA is bond counsel. GrayRobinson PA is disclosure counsel. Marchena and Graham PA is underwriters’ counsel.
