Fitch Affirms Overland Park Development Corp., KS Bonds at 'BB'; Outlook
NEW YORK -- January 22, 2013
Fitch Ratings takes the following rating action on Overland Park Development
Corporation, Kansas (the corporation):
--$64.9 million outstanding (Overland Park convention center hotel project)
second tier refunding revenue bonds, series 2007B affirmed at 'BB'.
The Rating Outlook is Stable.
The bonds are special limited obligations payable solely from a subordinate
lien on the net operating revenues of the convention hotel, a senior lien on a
4.5% citywide transient guest tax (TGT), subject to annual appropriation, and
a cash funded debt service reserve funded to the IRS standard. The bonds also
have a subordinate lien on the net operating revenues and leasehold interest
of the convention hotel and the 1.5% TGT supporting the superior lien bonds.
KEY RATING DRIVERS
NOMINAL CREDIT FOR NON-TAX REVENUE: The speculative grade 'BB' rating reflects
the inability of the dedicated 4.5% portion of the TGT to sustain 1x coverage
for debt service. Fitch gives little weight in its rating to the subordinate
pledge of net operating revenue from the single site convention center hotel
given its erratic revenues historically and the difficulty in quantifying
MARGINAL DEBT SERVICE COVERAGE: Total pledged revenues provided 1.3x coverage
in 2011 and are projected to provide 1.2x to 1.3x coverage in 2012.
ASCENDING DEBT SERVICE: Continued revenue growth from the citywide hotel tax
and/or the convention center hotel is necessary to sufficiently service the
ascending debt service load.
NEGLIGIBLE NON-APPROPRIATION RISK: Non-appropriation risk of hotel tax
revenues is low given the potential loss of the convention center hotel
coupled with the strong financial management of the city of Overland Park
(rated 'AAA' by Fitch).
STRONG LOCAL ECONOMY: Fitch believes the city's deep and diverse economy
supports sustainable long-term hotel demand despite recent weaknesses.
WHAT COULD TRIGGER A RATING ACTION
DETERIORATION OF COVERAGE: TGT performance has been mixed so far in 2012.
Sustained deterioration in TGT collections would present a credit concern and
could lead to a rating downgrade.
The corporation is a component unit of the city of Overland Park, and benefits
from its proximity to the Kansas City metro area. It is a not-for-profit
corporation created for the sole purpose of constructing and owning a 412-room
convention hotel located adjacent to the city's convention center. The
corporation board is comprised of six members of the city's governing body,
appointed by the mayor and approved by the city council.
The convention hotel opened in December 2002 and is operated as a Sheraton
hotel under a hotel operating agreement with Starwood Hotels & Resort (Fitch
Issuer Default Rating 'BBB', Outlook Stable) that expires in November 2022.
The city's convention center opened in 2002 and primarily hosts regional
business and community needs in 60,000 square feet of exhibit space and a
25,000 square foot ballroom.
Primary support for the rating is derived from the coverage generated from the
first lien on the 4.5% and second lien on the 1.5% citywide TGT imposed upon
the roughly 5,200 available hotel rooms located within the city. A citywide
hotel tax has been levied since 1982 and is collected by the state and
remitted to the city quarterly minus a 2% collection fee.
Little weight is given to the subordinate pledge of net revenues from the
convention hotel. However, Fitch notes that in recent years, net hotel
revenues have provided support for the superior lien bonds, freeing up much of
the additional 1.5% TGT revenues upon which the bonds have a subordinate lien.
Overland Park has covenanted to budget sufficient citywide hotel tax revenues
to pay the next year's debt service on the bonds pursuant to a debt service
support agreement between the city and the corporation. However, the
allocation of TGT revenues is subject to annual appropriation and is capped at
amounts received solely from the 4.5% and 1.5% TGT. Once the city appropriates
funds, the obligation is absolute and unconditional without abatement,
deduction or set-off and counterclaim.
The commitment of citywide TGT revenues can be released if debt service
coverage from net revenues of the convention hotel exceeds a certain
threshold; however, these revenues would be reinstated if coverage
subsequently fell below 1.75x at any time through maturity. Other legal
provisions, which only provide meaningful credit strength in the unlikely
event that the hotel tax commitment is released, include the crediting of all
convention hotel revenues under a lockbox agreement with the trustee, and a
1.05x rate covenant.
HISTORICAL REVENUES AND COVERAGE
The citywide hotel tax experienced a compounded annual growth rate of 6.1%
between 1994 and 2006, and the city reasonably forecasted 3.7% annual
increases between 2007 and 2018. Based on the 2007 forecast, available hotel
tax revenues were projected to fully cover annual debt service at least 1.4x
throughout the life of the bonds. However, due to the severity of the economic
recession, actual TGT revenues averaged a 2.4% decline over the past three
years (2008-11) with actual coverage of 1.0x in 2011 from the 4.5% TGT tax
GROWTH REQUIREMENTS FOR COVERAGE
The bonds are also supported by a cash funded debt service reserve totaling
$6.6 million. If estimated 2012 hotel tax revenues were held flat and no
revenues were received from the net operating revenue pledge, the debt service
reserve would be exhausted by 2018. Based on Fitch's calculations, 3.2% annual
growth in citywide hotel tax revenues plus amounts in the debt service reserve
would be necessary to sufficiently satisfy debt service in all years, relying
only upon the 4.5% portion of the TGT upon which the bonds have a first lien.
COMBINED PLEDGED REVENUES COVERAGE
Net operating revenues from the convention hotel and other balances have
enhanced debt service coverage in recent years. Coverage of debt service
available TGT revenues has hovered around 1x, and will remain pressured as
debt service requirements escalate.
Combined pledged revenues in 2010 and 2011 covered annual debt service 0.9x
and 1.3x respectively. However, 2011 combined pledged revenues cover maximum
annual debt service maturing in 2032 by only 0.5x because of the ascending
debt service structure.
ECONOMY DRIVES FUTURE HOTEL TAX PERFORMANCE
Citywide hotel occupancy historically has been driven by individual and group
business travelers. Local demand for hotels wavered somewhat in recent years
due to both the protracted economic recession and Sprint Nextel Corporation's
reduced presence within the city. However, as a positive development, several
other major corporations have sublet space on the Sprint campus, which has led
to increased hotel demand. The city encourages demand by tying economic
incentives to hotel usage and a recently constructed soccer/sports complex
contributes to hotel demand. Citywide hotel occupancy increased 0.8% through
October 2012, and the average daily room rate is up 3.3%.
STRONG LOCAL ECONOMY
Overland Park is the second largest city in the state of Kansas and located
within the Kansas City metropolitan area. The region benefits from a deep and
diverse local economy, an extensive transportation network, available land,
and a well-educated workforce. Several Fortune 500 companies are located
within the city. The financial services and professional and business service
sectors account for a greater percentage of total countywide employment
compared to the national average.
Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.
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, National Association of Realtors, Financial
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria
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