Fitch Upgrades Gilbert, Arizona Resources Muni Property Corp 2004 Water Bonds to 'A-'.

AUSTIN, Texas -- In the course of routine surveillance, Fitch Ratings has taken the following actions for the Gilbert, Arizona Water Resources Municipal Property Corporation's (the corporation) development fee and subordinate lien utility revenue bonds:

--$27.5 million series 2004 wastewater bonds upgraded to 'A-' from 'BBB+';

--$139.6 million series 2007 water bonds affirmed at 'A-'.

The Rating Outlook for both series is Stable.

Both series of bonds are payable from lease payments from the Town of Gilbert (the town) to the corporation. The lease payments are secured by a senior pledge of the revenues from the collection of the respective wastewater system development fees (SDFs) for the wastewater bonds and water SDFs for the water bonds, and by a subordinate lien and pledge of certain revenues derived from the operation of the town's wastewater system (for the wastewater bonds) and the town's water system (for the water bonds). Proceeds from both bond series were used to finance various capital improvements to the respective systems.

The rating upgrade on the wastewater bonds is based upon the improved debt profile of the wastewater system, the result of aggressive redemption of series 2004 bonds from SDF revenues that well exceeded debt service during the rapid growth period of 2005-2007. Of the $72.95 million original par amount, only $27.5 million of the series 2004 bonds remain outstanding. The 'A-' rating affirmation on the water bonds reflects satisfactory, albeit reduced debt service coverage levels due to the dramatic decline in SDF revenues over the past two years. Single family residential building permits in Gilbert declined from a recent peak of nearly 4,800 in fiscal 2004 to slightly more than 1,000 in fiscal 2009. Liquidity for both systems remains adequate, and the city maintains significant utility rate flexibility if necessary.

Located in the Phoenix metropolitan area, Gilbert witnessed dramatic growth over the past 15-20 years, with the population climbing from less than 30,000 in 1990 to more than 215,000 presently. It also witnessed an equally dramatic decline in the residential construction sector over the past 24 months. Evidence of the housing weakness is provided by the trend in SDF revenue collections. After peaking at nearly $20.5 million in fiscal 2006, wastewater SDF revenues slid steadily, totaling only $6.2 million in fiscal 2009. Water SDF revenues performed comparably, peaking at $20.1 million in fiscal 2006 and dropping to $6.3 million by fiscal 2009.

Fitch's concern regarding the significant decline in SDF revenues is tempered on the wastewater side by the application of SDF revenues to redeem more than $39 million of series 2004 bonds (the town also purchased $6.2 million of the series 2004 bonds in the secondary market). As a result of these actions, annual debt service coverage on outstanding wastewater system debt in fiscal 2008 was nearly 6.8 times (x) and nearly 2.7x when SDF revenues were excluded. Town officials hope to retire the remaining series 2004 bonds over the next 48 months with SDF revenues.

Of the $146.2 million water SDF bonds issued in 2007, $139.6 million remain outstanding. Debt service coverage has been affected both by the drop in SDF revenues and a ramping up of annual debt service; as a result, fiscal 2009 coverage on all water system debt declined to an estimated 1.7x and 1.25x when SDF revenues are excluded. In fiscal 2008, coverage was 3.4x and 1.9x when SDF revenues were excluded. Although these declining margins are a concern, they remain adequate for the 'A-' rating. Also, Fitch believes the significant rate affordability (the combined water and wastewater residential bill is slightly more than 0.5% of median household income) and the reserve levels detailed below offer much financial flexibility to system officials.

System liquidity is aided by repair and replacement (R&R) funds established with the issuance of the series 2004 wastewater bonds and the series 2007 water bonds. Town officials report that as of June 30, 2009 the unaudited wastewater R&R fund included nearly $23 million in unrestricted funds and the water R&R fund contained $26 million of unrestricted funds. Fitch views these reserve totals as sizeable cushions in the event of a significant system failure.

The 2004 and 2007 bond sales financed major treatment facilities for the water and wastewater systems, as well as other infrastructure improvements. These recent borrowings, combined with the dramatic slowdown in residential growth, have resulted in manageable near term capital needs for both systems. The five-year plan for the wastewater system includes less than $23 million in capital needs, while the water plan features roughly $83 million in various projects. Town officials report no near-term borrowing plans for either system.

Not surprisingly, tax base growth in Gilbert has slowed dramatically as the economy has decelerated. After a series of annual double-digit percentage gains, secondary assessed valuation (SAV) is expected to dip 3% for fiscal 2010 and town officials anticipate a decline of between 15%-25% for fiscal 2011. In addition to housing, commercial development also has slowed in recent months after a period of brisk growth fueled largely by major roadway improvements. Employment growth, which had been steady in recent years, dipped 3% from August 2008 to August 2009 and the unemployment rate climbed from low 3.1% to moderate 4.9% over the same period. Fitch notes that Gilbert's unemployment rate remains well below the state (9.3%) and national (9.6%) averages for the month.

Additional information is available at 'www.fitchratings.com'

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