Fitch Affirms 'A' Rating for Dallas, TX Sports Arena Project Special Tax Bonds.

Business Editors

AUSTIN--(BUSINESS WIRE)--Jan. 22, 2004

Fitch Ratings has affirmed its 'A' rating for the Dallas, Texas' (the city) special tax revenue bonds, series 1998A and series 1998B (taxable). The combined $140.4 million in bonds were sold to finance construction of the Dallas Sports Arena Project, which has since been renamed American Airlines Center. The Rating Outlook is Stable.

The affirmation of the 'A' rating is based on adequate, albeit declining, debt service coverage levels and a large and growing balance in the surplus debt redemption account. Tax collections declined over the past several years as the local economy cooled, but recent economic statistics suggest that local conditions are improving.

Both series of bonds are secured by a first lien on revenues from a 2% hotel occupancy tax and 5% motor vehicle rental tax collected within the city limits. Both taxes were approved by Dallas voters in January 1998; collection of the car rental tax began in June 1998, and hotel occupancy tax collections began in September 1998. The series 1998B bond ordinance also includes annual lease payments by the Dallas Stars, LP and Dallas Basketball Ltd., owners of the two professional sports teams that use the facility. This revenue stream was not considered in the initial analysis and rating. The ordinance authorizing the bonds does not allow for the issuance of additional bonds, except for refunding purposes.

The limitation of both taxes to transactions within the city excludes the sizeable car rental market at Dallas-Fort Worth International Airport. The original growth projection for the car rental tax revenues was 2.8%, while growth in hotel occupancy tax revenues was projected at 2% for 1999 and 3% annually thereafter. Debt service coverage originally was projected to ramp up from 1.2 times (x) initially to roughly 1.45x by fiscal 2008.

Early collections for both the car rental and hotel occupancy taxes were larger than anticipated; total combined collections in fiscal 2000 were $14.7 million, compared to the projected total of $11.5 million. In addition to generating better than expected coverage levels, the surplus revenues provided an opportunity to build up the surplus debt redemption account. This account was established to cover any revenue shortfalls or to redeem bonds. By September 2001 the balance in this account was $10.8 million.

Following a small increase in fiscal 2001, car rental tax collections declined each of the past two fiscal years as the national and local economies slid into recession. Hotel occupancy taxes, meanwhile, have declined annually since fiscal 2000. From their peaks, car rental tax revenues and hotel occupancy tax revenues have declined nearly 25% and 22%, respectively. While a concern, the drops have been from larger than expected initial collection amounts, and debt service coverage remains satisfactory; fiscal 2003 debt service coverage was 1.23x (excluding lease payments for the series 1998B bonds). Also, transfers to the surplus bond redemption account continue-the balance at fiscal 2003 year-end was $18.4 million.

The key to maintaining credit quality will be stabilization of tax revenues and avoidance of the surplus bond redemption account to pay debt service. A strengthening local economy should stop the decline in tax revenues and eventually would be expected to generate revenue growth. Employment statistics for the past several months suggest that economic conditions are improving. The November 2003 unemployment rate for the city was 8.0%; while high by historical standards, it is down from a 2002 high of 10.2%. The Dallas County and Dallas Primary Metropolitan Statistical Area unemployment rates also are off their recent highs. Given the diversity and size of the regional economy, the long-term prospects for the area remain favorable.