BRADENTON, Fla. — Standard & Poor’s on Wednesday chopped the underlying rating on Orlando, Fla.’s contract tourist development tax bonds to junk, to levels below where other rating agencies recently have cut the credit.
Standard & Poor’s lowered the rating on $190.25 million of senior-lien TDT Series 2008A bonds to BB from A.
On the subordinate series, Standard & Poor’s dropped the ratings to CCC from A on $33.36 million of second-lien 2008B bonds, and to CC from BBB-plus on $87.27 million of third-lien 2008C bonds.
The agency removed the ratings from watch status and placed a developing outlook on the 2008A and B bonds, while assigning a negative outlook to the 2008C bonds. All of the bonds are insured by Assured Guaranty Corp.
“The downgrades reflect our view of the substantial weakening of the revenue stream due to the national recession, our expectation that these bonds will likely rely on their liquidity and debt-service reserves for payment, and our view that significant growth in pledged revenues would be required to continue providing annual debt-service coverage,” S&P said in a report.
The special, limited obligation bonds were sold to finance most of the city’s new $480 million downtown multi-use events center and new home of the National Basketball Association’s Orlando Magic. The facility is on track to open this fall.
Debt service on all the bonds is paid from a trust estate, which receives collections from one-half of one percentage point of tourist taxes levied on short-term accommodations through a contract between Orlando and Orange County.
The city has been in contact with the insurer, Orlando’s chief financial officer, Rebecca Sutton, said in an interview this month.
Sutton pointed out that under the covenants for all the tourist-tax bonds, a draw on debt-service reserves would not be considered a default.
“TDT revenues declined 15.4% in fiscal 2009, the largest one-year drop in the history of the tax, due to reduced tourism activity stemming from the national recession,” Standard & Poor’s report said. “During the first half of fiscal 2010, revenues as reported by the county are 3.74% lower than for the same period in fiscal 2009.”
Based on current collections, debt-service coverage on May 1, 2010, the next debt-service payment date, will be 1.46 times on Series A bonds, 2.53 times on Series B, and 0.56 times on Series C, said the report. This would require Series C to tap liquidity reserves in order to make debt-service payments. In addition, the payment in May is an interest-only payment and higher debt-service payments are coming due on Nov. 1.
“Although the TDT revenue rate of decline is slowing down, it is not clear to us that these revenues have hit bottom or how quickly they might recover,” the report said.
It also noted that IHS Global Insight Inc. is projecting the Orlando area’s economic recovery to begin in the second half of 2010 as the rest of the nation emerges from the recession, “but it is hard to predict how soon economic recovery will translate into increased TDT revenues.”
Citing similar declines in the tourist tax, Fitch Ratings and Moody’s Investors Service had already downgraded underlying ratings on the A and B bonds. Neither rated the C bonds.
Fitch on March 26 downgraded both the Series A and B bonds below investment grade to BB-plus from BBB-plus, and to B from BBB-minus, respectively.
Moody’s on April 7 maintained an investment-grade rating on the Series A bonds, dropping the rating to Baa2 from A3. However, Moody’s downgraded the Series 2008B bonds to the below-investment-grade Ba1 from Baa1.