Fitch Affirms Rialto Redev Agency (California) Bonds at 'BBB+'; Revises Outlook to Negative.

NEW YORK -- In the course of routine surveillance, Fitch Ratings affirms the 'BBB+' ratings for the following Rialto Redevelopment Agency, California bonds:

--$132.4 million outstanding merged area tax allocation bonds (TABS);

--$38.8 million merged area tax allocation housing set aside bonds.

The Rating Outlook for all bonds is revised to Negative from Stable.

The 'BBB+' rating affirmation reflects the merged project area's sound legal provisions, adequate fund balances and strategic location of land available for development offset by taxpayer concentration, very slow debt amortization as well as somewhat reduced debt service coverage levels due to assessed value (AV) reduction and rising assessment appeals. The Outlook revision to Negative from Stable reflects the economic slowdown which now is stunting project area growth, as well as reductions in assessed valuation, tax increments and fund balances. Debt service coverage, while reduced, remains at acceptable levels. Additionally, rising tax base appeals and this fiscal year's large incremental tax revenue shift to the state have the potential to reduce balances below agency targets, and make rebuilding reserves more difficult. The agency conservatively reduced growth projections to better absorb the projected impact of the economic slowdown that may be more pronounced for this largely industrial and commercial project area.

The district is well located for economic activity and future development once recovery returns to this area. It comprises 54% of the City of Rialto in San Bernardino County about 15 miles from Ontario International Airport and 60 miles east of Los Angeles. The agency issues both housing and non housing bonds to finance improvements. The outstanding housing set aside bonds are payable from 20% of gross tax increments. The outstanding parity tax allocation bonds are payable from 80% remaining tax increments less tax sharing agreements excluding certain tax sharing agreements that are subordinated to debt service.

Tax base concentration is heavily concentrated in industry, warehousing, and distribution, now 44% of the tax base. The largest 10 taxpayers, represent 23% of AV and 30% of incremental value (IV), and include one residential housing developer. The major taxpayers are distribution centers for Target Corp. and Staples Office Superstore, as well as the owners of leased distribution and industrial facilities. Commercial property is 8% of AV with residential property comprising 19%, somewhat limiting concerns over the area's high mortgage delinquency and foreclosure rates and slow pace of construction and sales. While AV and IV growth has been strong, tax year 2010 AV declined 3.5% and IV 4.5%, in contrast to annual gains of over 25% on average between 2001-2009. The project area still has about 1,650 acres left for development, although about one-quarter of this space is considered habitat for an endangered species, creating some uncertainty regarding the restrictions on building and additional costs.

The agency conservatively projects a slower return to growth, severely limiting issuance of additional bonds. The additional bonds test (ABT) for all agency bonds is now a 'springing test' based on the relationship of the merged project area IV to AV, lowering to a 1.25 times (x) maximum annual debt service (MADS) test over time. Based on fiscal 2009 AV, the ABT is 150% and is anticipated to be at this level for the next few years.

Debt service coverage levels are projected to decline from ample coverage of 1.79x MADS from fiscal 2008 pledged revenues of $16.8 million for non housing TABS and 1.71x for housing bonds. The agency projects coverage levels falling to around 1.51x and 1.37x for non housing bonds and housing set-aside bonds, respectively, based on reductions in net tax increments in fiscal 2010.

Despite the lower incremental revenue forecast, coverage levels remain sufficient under Fitch designed stress tests. For example, both non housing and housing set aside bonds can sustain a loss of 25% of AV and still cover debt service 1.0x. Also, if 50% of appeals are awarded and no subordination of tax sharing agreements, non housing bond coverage of MADS falls to 1.35x as compared with 1.58x at the time of Fitch's last review. Under this same scenario, housing bond coverage would be 1.30x of MADS against 1.36x based on previous estimates. The loss of the top 10 taxpayers reduces non housing bond coverage of MADS to 1.00x with 0.98x for housing bonds. This is an extreme scenario and the district has debt service reserves on hand as well as ongoing monitoring of fiscal performance. The agency has good fund balances available to support revenue shifts to the state, if it chooses to use these balances for some or all of the transfer. Projected ending fiscal 2009 fund balance excluding debt service funds is $14 million to cover estimated $6.7 million in state shift payments in fiscal 2010 and $1.4 million in fiscal 2011.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 'www.fitchratings.com'. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.