Fitch Rates Anaheim Public Financing Authority, California $260.3MM Sr Revs 'A'; Outlook Stable.

SAN FRANCISCO -- Fitch assigns an 'A' rating to the following issues for the Anaheim Public Financing Authority (Orange County, California):

--$212.3 million senior lease revenue bonds (Anaheim Public Improvements Project), 2007 refunding series A;

--$48 million senior (taxable) lease revenue bonds, 2007 refunding series B.

Also, Fitch upgrades its rating on Anaheim Public Financing Authority's (the authority) $239.2 million in outstanding senior lease revenue bonds (Anaheim Public Improvements Project), 1997 series A to 'A' from 'BBB+'. The Rating Outlook is Stable.

The 2007 refunding bonds are expected to sell via negotiation by UBS Investment Bank, Citigroup, Goldman Sachs & Co., Lehman Brothers, and Stone & Youngberg, LLC on May 15, 2007. The bonds are special obligations of the authority payable solely from lease payments made by the City of Anaheim to the authority.

The 'A' rating and Stable Rating Outlook reflect the sound coverage of senior bonds' debt service and annual revenue growth even during the post-Sept. 11, 2001 economic downturn. Further, Anaheim's strong tourism draws, Disneyland and Disney's California Adventure, have excellent management, marketing, commitment to the city of Anaheim, and visitor attendance. There is a good cooperative arrangement between the city and the Walt Disney Co. These positive credit factors are somewhat offset by the concentrated tourism base, two facilities and related amenities that are largely owned by a single corporation, and the volatility inherent in a tourism-related area, which generates economically sensitive taxes. Lease rental payments are tied to the performance of certain tax revenues rather than being equal to debt service on the bonds. Further, combined senior and junior debt service coverage has the potential to be slim during periods of economic stress, and debt amortization is slow.

The bonds are secured by lease rental payments made by the city to the authority for use of a variety of essential city assets, including the Anaheim Convention Center and related parking structures, a stadium, maintenance facilities, three libraries, and a fire station. Lease payments come from the city's general fund and are subject to annual appropriation. However, the amount of the lease payment is limited to the total amount of lease payment measurement revenue (LPMR). LPMR consists of a portion of the city's hotel tax collected on all properties, except Disney-owned hotels. LPMR also includes incremental hotel, sales, and property tax revenues generated by Disney-owned properties in excess of baseline measurement revenues established in fiscal 1995 and adjusted annually by the greater of CPI or 2%. While the LPMR figure determines the amount paid by the city for debt service, the specific LPMR sources are not pledged to these bonds.

LPMR provides sound coverage of debt service on the senior bonds, and adequate coverage of the $211 million in unrated junior lien lease revenue bonds. Combined senior and junior debt service coverage has the potential to be slim during periods of economic stress. However, the Walt Disney Co. provides a first-loss guarantee for the junior bonds to FSA, which insures all of the senior and junior bonds. LPMR totaled $31.9 million in fiscal 2006 and is projected to total $32.9 million in fiscal 2007, which would provide 1.9 times (x) and almost 2x coverage, respectively, of senior bonds debt service. Actual LPMR performance between fiscals 2002 and 2005 was lower than the original 1997 projections due to the post-Sept. 11, 2001 economic downturn. Nevertheless, LPMR did continue to grow each year. More recently, LPMR grew 23.6% in fiscal 2006 (Disneyland's 50th anniversary), and is now exceeding the 1997 projections.

The bonds are also secured by a reserve in addition to the debt service reserve which is in the form of surety policies. This supplemental reserve reached $19.9 million by the end of fiscal 2006 and was built from LPMR amounts in excess of debt service. The authority intends to add the $18.8 million in cashflow savings resulting from the bond refunding through fiscal 2012. This would result in a supplemental reserve of $38.7 million or approximately 1.8x coverage of senior bonds debt service. Fitch views this supplemental reserve, which the city intends to use for early debt redemption, as a credit strength that somewhat mitigates the bonds' long maturity through fiscal 2037.

The authority expects LPMR to increase between 3.2% - 5.5% per year between fiscals 2007 and 2012, and 2.9% per year thereafter through fiscal 2037. Fitch applies more conservative assumptions under various stress scenarios, since LPMR is narrow in range and debt service increases annually. Nonetheless, even with LPMR growing slowly at 1% per year, senior bond debt service coverage remains around 2x annually.

Anaheim's general credit quality appears strong, with good tax base growth, a diverse employment base despite high taxpayer concentration due to the Walt Disney Co., and other economic indicators which exhibit stability. The city's financial operations show surpluses for the last several years, resulting in excellent fund balances. Overall debt ratios are moderate.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public web 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.