Fitch Rates Round Rock Transportation Corp., Texas' Sales Tax Bonds 'AA-'; Upgrades Outstanding.

AUSTIN, Texas -- Fitch rates Round Rock Transportation System Development Corporation (the Corp.), Texas' $11.58 million senior lien sales tax revenue refunding bonds, series 2006 'AA-'. The bonds are expected to price on a negotiated basis on Oct. 11, 2006 via a syndicate led by RBC Capital Markets. In addition, Fitch upgrades to 'AA-' from 'A+' the rating on the Corp.'s approximately $11.04 million in outstanding senior lien sales tax revenue bonds, series 2001. The Rating Outlook is Stable.

The bonds are secured by a dedicated 1/2% sales tax approved by two-thirds of the voters in August 1997. Proceeds will be used to refund a portion of outstanding series 2001 bonds for interest savings and pay costs of issuance.

The upgrade to 'AA-' reflects continued expansion of the area's retail and commercial base, strong sales tax growth, and favorable debt service coverage. While the transportation capital improvement plan (CIP) is sizable, only about 1/3 of the plan is to be funded from Corp. sales tax receipts. Although there is taxpayer concentration, risks are partially offset by significant ongoing and planned economic expansion as well as solid senior lien debt service coverage even after discounting Dell Computer Corporation's (Dell) share of taxes. In addition, the Corp. maintains a sizable cash reserves, and intends to issue junior lien bonds whenever possible, helping to ensure healthy senior lien coverage levels.

The Corp. is a non-profit industrial development corporation created by the city of Round Rock following voter approval of the 1/2% sales tax. The sales tax is to be used for various transportation improvements. Corp. board members are appointed by the city council and the financial administration of the sales tax is handled by the city.

Round Rock is a fast growing community and economic expansion is evidenced by the strong gains in sales taxes. From fiscal 2000-2005, sales tax collections have increased on average 11.6% annually. Preliminary fiscal 2006 collection estimates call for an 11.8% gain over the prior year's level. Actual fiscal 2005 sales taxes provide 6.8 times (x) coverage on senior lien bond maximum annual debt service (MADS) and 2.7x coverage on combined senior lien and junior lien obligations. Currently, the Corp. has approximately $30 million in junior lien obligations with the State Infrastructure Bank (SIB). The SIB provides for lower interest costs and more flexible borrowing provisions, including a no reserve requirement. Legal provisions for the bonds are satisfactory and allow the Corp. to create a separate reserve for each series of senior lien bonds. The 2006 series reserve requirement will be funded at closing.

Despite significant expansion of the area's retail base, sales taxes attributable to Dell (senior unsecured debt rated 'A' with a Negative Watch by Fitch) have kept pace or, in some years, outpaced area sales tax growth and still represent a significant share of total Corp. sales taxes. Over the past several years, sales taxes from Dell have consistently represented approximately 50% of annual collections. While this poses concentration risk, concerns are partially mitigated by satisfactory debt service coverage excluding Dell's 50% share of sale tax receipts. Based of fiscal 2005 collections and excluding 50% of collections, MADS coverage was still a solid 3.4x for senior lien and 1.4x for senior and junior lien bonds.

Further, the city continues to evolve as a major retail center. Recently, a major premium outlet mall has opened and IKEA, a large furniture store, is scheduled to open in Nov. 2006, helping to diversify sales tax collections. In addition, a large mixed-use project with an office building, some retail, and multi-family housing is underway to coincide with the newly developed State Highway 45 toll project.

The transportation CIP for Round Rock totals $410 million, of which $67 million (including proceeds from the series 2001 bonds and outstanding SIB loans) is financed through local share. The balance is funded from state, county, and private (developer) contributions. No additional senior lien bond issuance is currently planned. Although there are no concrete plans now, future borrowing will likely come from additional SIB loans.

Located just north of Austin, Round Rock continues to record significant growth. Attracted by the availability of more affordable housing with easy access to all parts of Austin, the city's population nearly doubled from 1990-2000 to about 61,000. Current city population is estimated at 88,500, up 47% since 2000. Taxable assessed values continue to post healthy annual gains, with fiscal 2007 values up 10.2% from the prior year. Resident wealth levels are above state and national norms and city unemployment rates are low; the 2005 unemployment rate was 3.6%.

Dell's presence in the regional economy remains significant, despite some employment contraction in the early part of this decade. The computer giant is the largest private employer in the Austin metropolitan area, employing 17,000 in the region. The Round Rock facility alone employs about 9,500, 30% of which are believed to reside in the city. In addition to Dell and the city's large retail base, other major employers include healthcare, insurance, government, and manufacturing concerns. Further, in conjunction with Texas State University, the Round Rock Higher Education Center began providing college instruction in Round Rock in fall of 2005. Ultimately, the new campus will become a full-service college and is expected to attract development in the northeast section of the city.

The city of Round Rock's own financial position is solid, buoyed by steady economic gains and extensive fiscal planning and conservative management policies. The fiscal 2005 undesignated general fund balance represented nearly 50% of expenditures and transfers out, as the city recognizes the economic sensitivity of sales taxes, its largest operating revenue source. As a result of this dependence, the property tax rate is very low in comparison to other cities in the state. Direct debt levels are moderate, while overall debt ratios are above average due to growth-generated debt issuances by the school district.

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