Reserves protect municipal bonds buffeted by Disney theme park woes

A warning sign displayed Sept. 30 outside the ticket booths for Disneyland in Anaheim, California, which has been closed since March 14.
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Solid reserves will protect municipal bonds buffeted by troubles at the Walt Disney Co. theme parks that were underscored by the announcement that it will lay off 28,000 employees at its resorts in Anaheim, California, and Orange County, Florida, according to Moody's Investors Service.

California's Disneyland Park has been closed since March 14 amid the initial wave of closures after COVID-19 hit the U.S. The Walt Disney World parks in Florida also closed in March, but reopened in June with attendance restrictions to reduce crowding.

Bonds secured “by tourism-related revenues will maintain their strong credit quality because of robust reserve funds,” even though the layoffs are “credit negative for both municipalities, because of the financial effect from the job losses and the signal that Disney expects its U.S. parks’ business to continue suffering for some time,” Moody’s analysts wrote in a comment piece Oct. 2.

California Gov. Gavin Newsom, a Democrat, has outlined a more stringent process for re-opening than Florida Gov. Ron DeSantis, a Republican. California aborted reopening efforts in some counties in July after infections in the state spiked. The state has pursued a more gradual reopening strategy in recent weeks without a new spike in COVID-19 cases.

DeSantis has lifted most state COVID-19 restrictions. Florida's new case numbers have declined since the summer.

Anaheim’s two Disney theme parks have been closed since March “and will remain closed until current state restrictions on amusement parks are lifted,” Moody's analysts wrote.

“The city’s economy is dominated by tourism, entertainment and convention activity, with approximately 25 million people visiting the city in 2019,” according to a May Fitch Ratings report. At that time, Fitch said that Anaheim’s Disney resorts employed 32,000 people.

Anaheim Mayor Harry Sidhu has called for the Disney parks to reopen.

Anaheim city spokesman Mike Lyster responded in an email that the city had no comment on what was contained in Moody’s report.

Though Anaheim’s budget doesn't call out Disney specifically, it says hotel revenues typically make up 40% of the city's general fund revenues. Hotel occupancy tax revenues are expected to fall to 24% of the general fund for the current fiscal year, which began July 1. The city approved a $1.7 billion budget for fiscal year 2020-21 on June 23 that reduced expenses by 20% from the prior year to close a $75 million shortfall.

The March stay-at-home orders "essentially halted all revenue from Transient Occupancy Taxes and also reduced revenues from Sales and Use Taxes," interim city manager Gregory Garcia wrote in his June 23 budget transmittal letter.

The Anaheim Public Financing Authority made an unscheduled $7.1 million draw on its special reserve fund Aug. 27 to make payments on its 1997 Series C bonds and its Series 2019A bonds, according to a disclosure notice posted Sept. 1 on the Municipal Securities Rulemaking Board’s EMMA website.

S&P Global Ratings downgraded Anaheim's senior revenue bonds to A-minus from A on Sept. 15, with a negative outlook. Fitch Ratings rates them AA-minus.

Moody's rates the bonds A1.

“Anaheim’s special reserve fund will continue to provide strong support for its senior lease revenue bonds — even if the city collects no tourism revenue through the end of August 2022,” Moody’s analysts wrote. “The city, which is coping with a significant drop-off in tourism largely because of the shuttered Disneyland, made its Sept. 1 payment on the senior lease revenue bonds without tapping the SRF. Anaheim did, however, make an unscheduled $7.1 million draw on the SRF for the September debt payment on its 1997 Series C bonds, which accounted for about one-third of total debt service for the subordinate bonds.”

The special reserve fund currently meets its required minimum funding level of maximum annual debt service of close to $75 million in 2036, according to Moody’s analyst.

The city’s 1997 Series A, 2019 Series A and 1997 Series C lease revenue bonds are payable from its general fund and secured by a mix of essential and less essential assets, Moody’s analysts wrote.

The A1 rating and stable outlook, which considers various factors such as the strong support provided by the special reserve fund, are appropriately positioned, said Alexandra Cimmiyotti, a Moody’s analyst.

In May, Fitch also revised the outlook on Anaheim’s AA-plus issuer default rating to negative from stable. It also applied that negative outlook to the AA rating of the city’s series 2014 lease revenue bonds issued by the authority to pay for the city’s convention center expansion. Anaheim's AA-minus-rated senior lease revenue bonds were assigned a stable outlook.

The bonds, in both regions, retained investment-grade ratings and stable outlooks from Moody's, in part, because of robust reserve funds, according to Moody’s analysts.

In Florida

In Florida's Orange County, Walt Disney World and other theme parks may be open but tourism is far from bouncing all the way back to pre-pandemic levels.

Low attendance coupled with social distancing measures to stem COVID-19 infections are keeping tourist development tax revenue collections to historic low levels.

Orange County Comptroller Phil Diamond said Monday that TDT collections totaled $5.78 million in August, a 71% year-over-year decrease.

August's revenues were a slight improvement over July, when collections were $5.15 million, a 77.2% decrease compared with July 2019.

Tourist development taxes, which are collected on hotel and other short-term accommodations in Florida, have been in freefall since March when Disney, Universal Orlando, SeaWorld and smaller venues closed to help contain the spread of the new coronavirus.

Most Orlando-area theme parks, including Disney's, reopened in June.

Diamond said occupancy rates rose to about 50% over the long Labor Day weekend, although room inventories were down by almost 25% due to hotel and motel closures. Average room rates also fell by 21% compared to last year.

Central Florida, and the five-county Orlando region where many theme park workers live, is also experiencing the highest unemployment rate in the state — 10.9% in August — with thousands of tourism workers laid off or on extended furloughs.

The comptroller's office said funds from the renewal and replacement reserve are still being used to offset shortfalls in hotel tax collections. A separate bond reserve for TDT-backed revenue bonds remains fully funded at $80.2 million.

Orange County had $727 million of outstanding TDT-backed revenue bonds as of Oct. 1. The debt financed capital needs and expansion projects at the Orange County Convention Center. The bonds are rated AA by Fitch, Aa2 by Moody's, and AA-minus by S&P.

The county took $14.9 million from the renewal and replacement reserve to pay for various funding obligations, leaving $185.3 million in that account in August. The draw included $4 million to supplement TDT collections in the sinking fund for debt service, Chief Deputy Comptroller Eric Gassman told The Bond Buyer Wednesday.

In September, Orange County officials pulled the plug on a planned $605 million bond-financed expansion project at the convention center amid the continuing decline in hotel tax collections.

Bonds secured by TDT account for the vast majority of Orange County’s debt, according to Moody’s report, but Nisha Rajan, a Moody’s analyst, said not all of Orange County’s debt is paid from tourism taxes. About $215 million is backed by a variety of revenue streams including sales taxes and a covenant to budget and appropriate non-ad valorem revenues, public service taxes and state sharing revenues.

One indicator of the state of demand for Central Florida travel is passenger numbers at Orlando International Airport, which for August were down 67.9% year-over-year for domestic travel and 97.9% for international arrivals.

Disney World notified Florida employment officials on Wednesday that 8,857 part-time union employees furloughed earlier in the year will be laid off, and that 6,700 non-union employees would lose jobs in early December, according to the Orlando Sentinel. The combined cuts amount to about 20% of the workforce.

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