Fitch Upgrades Chesterfield Valley Transportation Development District, MO Sales Tax Bonds to 'BB+'

Fitch Ratings has upgraded the following Chesterfield Valley Transportation Development District, MO (the district) bonds:

--$13.21 million series 2006 transportation sales tax revenue bonds to 'BB+' from 'BB'.

The Rating Outlook is Stable.

SECURITY

The bonds are limited obligations payable solely from the net revenues of a 0.375% tax on retail sales within the district, subject to annual appropriation by the district. The sales tax expires February 2031, five years after the final maturity of the bonds. There is also a cash-funded debt service reserve fund (DSRF) with a $2.03 million funding requirement.

KEY RATING DRIVERS

RECENT SALES TAX IMPROVEMENT: The district's sales tax base has noticeably improved with the opening of two sizeable outlet centers in August 2013 and improvements in the local economy. Collections inherently remain subject to volatility.

DSRF RELIANCE: Despite recent improvement, revenue performance remains consistently below expectations at the time of issuance, triggering an intra-year reliance on the cash funded debt service reserve fund for the past five years. The draw in 2014 was significantly smaller than prior draws, and further draws may be eliminated if pledged revenue growth continues.

BULLET MATURITY & REQUIRED TURBO: Fitch views the debt structure as generally weak with interest only payment requirements between 2017 and 2025 and a bullet maturity in 2026. Excess revenues would be used for early redemption.

HIGH CONCENTRATION: Sales in the district are highly concentrated, with the top 15 payers accounting for 45% of collections.

ACCESSIBLE LOCATION: The district encompasses a 7.43 square mile retail corridor along Interstate 64 which caters to the affluent St. Louis County region.

RATING SENSITIVITIES

REVERSAL OF REVENUE TREND: A notable declining trend in pledged revenue, which Fitch does not expect, would likely result in downward rating pressure.

CONTINUED REPAYMENT RISK: Given the risks inherent in the bonds' structure Fitch believes further upward rating movement is unlikely in at least the intermediate term.

CREDIT PROFILE

The district encompasses a sizable 7.43 square mile area located along a five-mile corridor of Interstate-64 in western St. Louis County. There are currently 697 vendors located within the district.

WEAK LEGAL PROVISIONS

Fitch views the bond structure as weak. In the event annual revenues exceed debt service requirements, the first $500,000 up to a total of $2 million goes into a future projects account. To date $170,000 has been deposited in this account. Excess sales tax revenues beyond those deposited to the future projects account are to be used to redeem the 2026 bullet via a mandatory redemption feature. Pre-payment of the 2026 bullet is critical to its ultimate repayment, as annual revenues are well below the bullet payment.

The bond documents allow for liberal issuance of additional parity and subordinate debt. There is no limitation to the amount of similar subordinate bonds that the district can issue, so repayment of the 2026 bullet could be materially impaired, though management states that is not planning to issue additional similar notes. The district issued subordinate debt twice in the last two years, although neither issuance affects repayment of the Fitch-rated bonds. The district is planning to issue bonds in early 2015 to refund all outstanding notes and bonds.

NEW OUTLET MALLS EXPAND TAX BASE

The district comprises one of the largest concentrations of big box retailers in the region. The top 15 payers in 2013 account for a high 45% of total sales tax collections.

Taxpayer concentration has materially declined with the August, 2013 opening of two large outlet malls operated by Simon Property Group and Taubman. Since the opening of the malls, four stores in the new malls have entered the top 15 payers. The Simon-operated mall is fully leased. The developer has delayed until 2016 plans to add an additional 75,000 square feet of space. The Taubman mall is approximately half vacant but has had several significant recent additions.

SALES TAX REBOUND

Sales in the district for the first 12 months after the opening of the malls were up 27% versus the prior 12 months. Sales tax revenues for the first nine months of 2014 increased by a robust 21% over same period collections in 2013. The new outlet malls opened in August, 2013 so the 2013 nine-month period includes two months of revenues from the malls. This growth follows increases of 11.2% in 2013, 7.3% in 2012 and 8.5% in 2011. Between fiscals 2007 and 2010, sales tax collections in the district fell by nearly 16%. The decline was mostly attributable to the recession but also due partly to a one month payment lag in 2010, created when the state assumed sales tax collection responsibilities from the city of Chesterfield (the city) in early 2010.

Sales tax revenues were insufficient to meet debt service requirements, forcing the district to draw upon the DSRF annually beginning in 2010. Draw-downs covered as much as 24% of the larger April principal and interest payment in those years. In all four years, the DSRF requirement was restored before the end of the year as sales taxes were received and deposits were made per the flow of funds. With improved operations, the 2014 draw was greatly reduced to $55,739 or 3% of debt service. No draw is expected in 2015, after which annual debt service drops significantly until 2026.

SATISFACTORY COVERAGE LEVELS ASSUMING NO ADDITIONAL DEBT

Assuming no growth in sales tax revenues, Fitch's analyses indicate that pledged revenues and DSRF monies should be more than adequate to cover all debt service requirements assuming no further issuance of subordinate debt, with full payoff in approximately 2020. Under Fitch's stress scenario, sales tax collections could decline by 12% annually over the life of the issue and, with DSRF monies, still meet all debt service requirements. The largest annual revenue decline to date was 7.6% in 2010.

WEALTHY, GROWING SERVICE AREA

Wealth levels in the city and county are well above state and national averages, and unemployment rates are below them, rebounding from increases during the recent economic downturn. The county supports a diverse economic base, which includes Monsanto and Washington University.

The city has several major economic development projects underway, highlighted by significant growth at Mercy, a large health care system headquartered in the city, and the relocation of the headquarters of Reinsurance Group of America. These projects will bring a sizable number of workers to the area, increasing the population of potential shoppers within the district.

APPROPRIATION RISK

The district is managed by a four-member board consisting of representatives of the city and county. The pledged sales tax is subject to annual appropriation by the district. However, non-appropriation is unlikely as the pledged sales tax cannot be used for non-district purposes. Furthermore, if the district fails to adopt a budget in any year, the prior year's budget will remain in effect.

Additional information is available at 'www.fitchratings.com'

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, Zillow.com, National Association of Realtors.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria', dated Aug. 14, 2012;

--'U.S. Local Government Tax-Supported Rating Criteria', dated Aug. 14, 2012.

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=959095

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