New York, November 27, 2012 -- Moody's Investors Service has affirmed the A1 rating on the City of Pembroke Pines's (FL) Capital Improvement revenue bonds, affecting $38.8 million of outstanding rated parity debt obligations. The bonds are secured by the city's pledge of the electric franchise fees received from Florida Power & Light (FP&L) (long term rating A2/stable outlook) as stated in the August 2008 agreement. The fee is based on 5.9% of revenues derived from FP&L's electricity sales within the city limits.
SUMMARY RATINGS RATIONALE
The A1 rating reflects the large, primarily residential $12.6 billion tax base, included within Miami-Fort Lauderdale-Pompano Beach MSA, as well as a healthy population growth (12.6% since 2000) that contributes to the strength of the electric franchise fee security. The affirmation incorporates the declining yet relatively stable maximum annual debt service (MADS) coverage of 1.35 in fiscal 2011. The primary drivers of the decline pledged revenues include a new 30-year franchise contract with FP&L that decreased franchise fee from 6% of electric sales to 5.9% and the overall impact of the economic downturn on usage. The A1 rating also factors in the modest negative revenue volatility over the last ten years with a peak-to-trough of -9.4%. MADS coverage is expected to decline to 1.33 times in fiscal 2012 but forecasted to improve to 1.38 times by fiscal 2013. Assumptions include standard inflation and modest population growth. Positively, the city anticipates roughly 1,000 new near-term connections to the electric system due to the competition of the first phase of a 700-unit residential development and construction of a hotel. Other components of the rating take into account the adequate legal covenants, including an additional bonds test (ABT) of 1.25 times MADS, a surety-funded debt service reserve fund by Ambac, and the city's demonstrated the ability, willingness, and use of other non-pledged revenues to pay debt service of these bonds.
Moody's notes that the city once had exposure to variable rate debt obligations with the issuance of the Variable Rate Capital Improvement Bonds, Series 2008. As a result of the downgrade of SunTrust Bank (long-term rating A3/stable outlook), the letter of credit was not extended and the city refunded $8.04 million, through private-placement with TD Bank (long-term rating Aa2/rating under review for downgrade), on September 7, 2011. The bonds bear a 2.0079% interest rate over a five-year period, through September 16, 2016. With written notice, the owner of the bonds has the right to put the bonds back to the issuer at the end of the five-year period. The issuer will have up to six months from the notice date to purchase the bonds in full. Despite this put risk, Moody's believes that, in this unlikely event, excess franchises fee revenues will be sufficient to cover the put bonds. In fiscal 2011, the city utilized approximately 14% of the $8.3 million franchise fee revenues for debt service. Pledged revenues are $8.1 million (unaudited) in fiscal 2012 and $8.5 million (projected) in fiscal 2013. Presently, after monthly segregation of funds, excess revenues are used for normal operating expenditures of the city's General Fund.
- Benefits from surrounding Miami-Fort Lauderdale-Pompano Beach MSA
- No near-term plans to issue additional parity debt
- Demonstrated ability, willingness, and use of non-pledged revenues to pay a majority share of debt service obligation
- Management's ability to mitigate variable interest rate risk
- Reduced pledged revenues due to lower negotiated franchise fee to 5.9%
- A degree put risk related to the 2011 privately placed bonds
WHAT COULD MAKE THE RATING GO UP
- Improved and maintained MADS coverage
WHAT COULD MAKE THE RATING GO DOWN
- Electric franchise fee revenues and MADS coverage that do not meet the city's projections
- Overleveraging of debt
- Deterioration of local economy
The principal methodology used in this rating was US Public Finance Special Tax Methodology published in March 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
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Michelle Young Choi Associate Analyst Public Finance Group Moody'sInvestors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653Edward Damutz VP - Senior Credit Officer Public Finance Group JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653 Releasing Office: Moody's Investors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653(C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.
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