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Fitch Rates Gainesville Hospital District, TX Ltd Tax Rfdg Bonds 'AA-'; Outlook Stable.

Austin: Fitch Ratings has assigned an 'AA-' rating to the following Gainesville Hospital District (the district), TX bonds:

--$42.5 million limited tax refunding bonds, taxable series 2018A.

The Rating Outlook is Stable.

Fitch has also affirmed and withdrawn the Issuer Default Rating of 'D' based on the district's filing for Chapter 9 bankruptcy reorganization on Jan. 17, 2017. The withdrawal is based on Fitch's assessment that the issuer is no longer subject to any operating risks based on the provisions of its long-term operating lease agreement with a third party to operate the North Texas Medical Center (NTMC).

The bonds are scheduled for negotiated sale during the week of Dec. 3. Proceeds will be used to refund all of the district's outstanding limited tax bonds as approved in the Confirmation Order (the order) of the district's plan of adjustment.

Fitch has upgraded the outstanding taxable series 2017, 2017A, 2017B and 2018 limited tax bonds, which will be defeased with the proceeds of the series 2018A bonds, to 'AA-' from 'A'.

SECURITY

The bonds are payable from an annual property tax levy against all taxable property within the district. The district's property tax rate is limited to a maximum of $0.75 per $100 taxable assessed valuation (TAV) for all purposes, provided that no more than $0.65 per $100 TAV of such tax may be levied for debt service.

ANALYTICAL CONCLUSION

The 'AA-' rating reflects Fitch's assessment that the revenues pledged to the series 2018A "post-emergence" bonds have been determined by the bankruptcy court to constitute pledged "special revenues" under the U.S. bankruptcy code and therefore bondholders are legally insulated from any operating risk of the district. The upgrade to 'AA-' reflects the elimination of debt acceleration risk, solid pledged revenue growth prospects and ample tax rate capacity to offset potential tax base volatility, balanced against Fitch's asymmetric economic risk consideration of the narrow and concentrated tax base and moderate degree of tax base concentration in the energy sector. The 'D' IDR reflects the district's filing for Chapter 9 bankruptcy reorganization on Jan. 17, 2017 following multiple years of operating losses.

Economic Resource Base

The district comprises the eastern two-thirds of Cooke County (2017 population 39,895) and is located approximately 70 miles north of Dallas and five miles south of the Texas-Oklahoma border. The district owns the North Texas Medical Center (NTMC), a 48-bed acute care hospital located in Gainesville.

KEY RATING DRIVERS

SPECIAL REVENUE ANALYSIS: The 'AA-' rating is based on a dedicated tax analysis without regard to the district's financial operations. Pursuant to the bankruptcy court's determination of the pledged revenues as "special revenues" as defined in Sec. 902(2)(E) of the bankruptcy code, bondholders are insulated from any operating risk of the district.

EMERGENCE FROM BANKRUPTCY: Pursuant to the order, effective Nov. 16, 2018, the district is released from all debts apart from those to be refunded with the current offering of post-emergence bonds.

GROWTH PROSPECTS FOR REVENUE STREAM: Using TAV as a proxy for revenues, Fitch expects pledged revenues will continue a solid positive trajectory based on current economic conditions.

RESILIENCE OF PLEDGED REVENUES: Ample taxing margin and absence of parity debt plans provide a solid degree of resilience to the debt structure. The rating also reflects the asymmetric economic risk of a limited and concentrated economy as well as a moderate degree of concentration in the tax base.

RATING SENSITIVITIES

MATERIAL DECLINES IN TAX BASE: Material and sustained declines in the district's tax base or economy may put negative pressure on the rating.

CREDIT PROFILE

The district includes the city of Gainesville, which serves as the county seat and the principal commercial center. Oil and gas manufacturing underpin the somewhat narrow economy, supplemented by manufacturing, utility, railroad and retail enterprises. TAV expanded by a CAGR of 2.8% for the 10-year period through fiscal 2019 and posted only two years of modest 0.2% declines, in fiscal 2010 and 2016. The top-10 taxpayers account for nearly 18% of fiscal 2019 TAV (up from under 11% the year prior) represented primarily by oil exploration and wind farms.

PLEDGED PROPERTY TAXES DEEMED SPECIAL REVENUES BY COURT

The specific features of the 2018A bonds meet Fitch's criteria for rating special revenue obligation debt without consideration of the district's general credit quality. Fitch believes bondholders are effectively insulated from the operating risk of the district.

Fitch sets a high bar for considering local government tax-supported debt to be secured by special revenues, which provide security that survives the filing of a municipal bankruptcy (in preservation of the lien) and benefit from relief from the automatic stay provision of the bankruptcy code. Fitch gives credit to special revenue status only if, in the agency's view, the overall legal framework renders remote a successful challenge to the status of the debt as secured by special revenues under Section 902(2)(E) of the U.S. Bankruptcy Code. In this case, the order, which approved the plan of adjustment and proposed disclosure statement, and granted bankruptcy relief, designated the pledged revenues as "special revenues" under the code.

As a result, Fitch analyzes these bonds as dedicated tax bonds. This analysis focuses on the district's economy and tax base without regard to financial operations because Fitch believes that bondholders are insulated from any operating risk of the district. The ability to make debt service payments is unlikely to be reduced by expected cyclical variations in the tax base and economy based on historical performance of the tax base. The refunding also eliminates the acceleration and interest rate risk associated with the refunded bonds issued during bankruptcy proceedings.

SOLID REVENUE GROWTH PROSPECTS

To evaluate the sensitivity of the dedicated revenue stream to cyclical decline, Fitch considers both revenue sensitivity results (using a 1% decline in national GDP scenario) and the largest decline in revenues over the period covered by the revenue sensitivity analysis. Based on the 15-year tax base history, Fitch's analytical sensitivity tool (FAST) generates a 1% scenario decline in pledged revenues associated with that level of decline in the tax base. The largest actual cumulative decline in the historical tax base is a 0.2% decline in 2016, less than the assumed 1% scenario decline.

AMPLE TAXING MARGIN OFFSET BY ASYMMETRIC ECONOMIC RISKS

Based on Fitch's expectation that the operator of NTMC and not the authority is responsible for capital improvements (per the operating lease agreement), the current pro-forma debt service schedule represents the maximum leverage of the district. Levied at the maximum $0.65 per $100 TAV for debt service (compared to the current rate of $0.12), the structure could withstand a decline in revenues of 82% and still cover MADS, equal to 82x Fitch's scenario decline and over 400x the largest historical decline. This level of resilience well exceeds the threshold for a 'aaa' assessment. However, the 'AA-' rating incorporates the asymmetric economic risk of the relatively limited economy as well as a moderate degree of taxpayer concentration.

MODEST LIABILITY BURDEN

The low debt burden, mostly comprised of overlapping debt, indicates that it is unlikely that the tax rate needed to repay district debt would pressure the rating. Using the wealth indicators of Cooke County (two-thirds of which is within the district), the liability burden is approximately 9% of personal income. Almost three-quarters of the overall debt is comprised of overlapping debt.
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Publication:Daily the Pak Banker (Lahore, Pakistan)
Date:Jan 25, 2019
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