January 22, 2013 / 8:54 PM / 5 years ago

TEXT - Fitch affirms Overland Park Development Corp, Kansas revs

Jan 22 - Fitch Ratings takes the following rating action on Overland Park
Development Corporation, Kansas (the corporation):

--$64.9 million outstanding (Overland Park convention center hotel project) 
second tier refunding revenue bonds, series 2007B affirmed at 'BB'.

The Rating Outlook is Stable.

SECURITY 

The bonds are special limited obligations payable solely from a subordinate lien
on the net operating revenues of the convention hotel, a senior lien on a 4.5% 
citywide transient guest tax (TGT), subject to annual appropriation, and a cash 
funded debt service reserve funded to the IRS standard. The bonds also have a 
subordinate lien on the net operating revenues and leasehold interest of the 
convention hotel and the 1.5% TGT supporting the superior lien bonds.

KEY RATING DRIVERS

NOMINAL CREDIT FOR NON-TAX REVENUE: The speculative grade 'BB' rating reflects 
the inability of the dedicated 4.5% portion of the TGT to sustain 1x coverage 
for debt service. Fitch gives little weight in its rating to the subordinate 
pledge of net operating revenue from the single site convention center hotel 
given its erratic revenues historically and the difficulty in quantifying future
revenues. 

MARGINAL DEBT SERVICE COVERAGE: Total pledged revenues provided 1.3x coverage in
2011 and are projected to provide 1.2x to 1.3x coverage in 2012. 

ASCENDING DEBT SERVICE: Continued revenue growth from the citywide hotel tax 
and/or the convention center hotel is necessary to sufficiently service the 
ascending debt service load.

NEGLIGIBLE NON-APPROPRIATION RISK: Non-appropriation risk of hotel tax revenues 
is low given the potential loss of the convention center hotel coupled with the 
strong financial management of the city of Overland Park (rated 'AAA' by Fitch).

STRONG LOCAL ECONOMY: Fitch believes the city's deep and diverse economy 
supports sustainable long-term hotel demand despite recent weaknesses.

WHAT COULD TRIGGER A RATING ACTION 

DETERIORATION OF COVERAGE: TGT performance has been mixed so far in 2012. 
Sustained deterioration in TGT collections would present a credit concern and 
could lead to a rating downgrade. 

CREDIT PROFILE

The corporation is a component unit of the city of Overland Park, and benefits 
from its proximity to the Kansas City metro area. It is a not-for-profit 
corporation created for the sole purpose of constructing and owning a 412-room 
convention hotel located adjacent to the city's convention center. The 
corporation board is comprised of six members of the city's governing body, 
appointed by the mayor and approved by the city council. 

The convention hotel opened in December 2002 and is operated as a Sheraton hotel
under a hotel operating agreement with Starwood Hotels & Resort (Fitch Issuer 
Default Rating 'BBB', Outlook Stable) that expires in November 2022. The city's 
convention center opened in 2002 and primarily hosts regional business and 
community needs in 60,000 square feet of exhibit space and a 25,000 square foot 
ballroom.

LEGAL STRUCTURE

Primary support for the rating is derived from the coverage generated from the 
first lien on the 4.5% and second lien on the 1.5% citywide TGT imposed upon the
roughly 5,200 available hotel rooms located within the city. A citywide hotel 
tax has been levied since 1982 and is collected by the state and remitted to the
city quarterly minus a 2% collection fee. 

Little weight is given to the subordinate pledge of net revenues from the 
convention hotel. However, Fitch notes that in recent years, net hotel revenues 
have provided support for the superior lien bonds, freeing up much of the 
additional 1.5% TGT revenues upon which the bonds have a subordinate lien.

Overland Park has covenanted to budget sufficient citywide hotel tax revenues to
pay the next year's debt service on the bonds pursuant to a debt service support
agreement between the city and the corporation. However, the allocation of TGT 
revenues is subject to annual appropriation and is capped at amounts received 
solely from the 4.5% and 1.5% TGT. Once the city appropriates funds, the 
obligation is absolute and unconditional without abatement, deduction or set-off
and counterclaim. 

The commitment of citywide TGT revenues can be released if debt service coverage
from net revenues of the convention hotel exceeds a certain threshold; however, 
these revenues would be reinstated if coverage subsequently fell below 1.75x at 
any time through maturity. Other legal provisions, which only provide meaningful
credit strength in the unlikely event that the hotel tax commitment is released,
include the crediting of all convention hotel revenues under a lockbox agreement
with the trustee, and a 1.05x rate covenant.

HISTORICAL REVENUES AND COVERAGE

The citywide hotel tax experienced a compounded annual growth rate of 6.1% 
between 1994 and 2006, and the city reasonably forecasted 3.7% annual increases 
between 2007 and 2018. Based on the 2007 forecast, available hotel tax revenues 
were projected to fully cover annual debt service at least 1.4x throughout the 
life of the bonds. However, due to the severity of the economic recession, 
actual TGT revenues averaged a 2.4% decline over the past three years (2008-11) 
with actual coverage of 1.0x in 2011 from the 4.5% TGT tax alone. 

GROWTH REQUIREMENTS FOR COVERAGE

The bonds are also supported by a cash funded debt service reserve totaling $6.6
million. If estimated 2012 hotel tax revenues were held flat and no revenues 
were received from the net operating revenue pledge, the debt service reserve 
would be exhausted by 2018. Based on Fitch's calculations, 3.2% annual growth in
citywide hotel tax revenues plus amounts in the debt service reserve would be 
necessary to sufficiently satisfy debt service in all years, relying only upon 
the 4.5% portion of the TGT upon which the bonds have a first lien.

COMBINED PLEDGED REVENUES COVERAGE

Net operating revenues from the convention hotel and other balances have 
enhanced debt service coverage in recent years. Coverage of debt service 
available TGT revenues has hovered around 1x, and will remain pressured as debt 
service requirements escalate. 

Combined pledged revenues in 2010 and 2011 covered annual debt service 0.9x and 
1.3x respectively. However, 2011 combined pledged revenues cover maximum annual 
debt service maturing in 2032 by only 0.5x because of the ascending debt service
structure.

ECONOMY DRIVES FUTURE HOTEL TAX PERFORMANCE 

Citywide hotel occupancy historically has been driven by individual and group 
business travelers. Local demand for hotels wavered somewhat in recent years due
to both the protracted economic recession and Sprint Nextel Corporation's 
reduced presence within the city. However, as a positive development, several 
other major corporations have sublet space on the Sprint campus, which has led 
to increased hotel demand. The city encourages demand by tying economic 
incentives to hotel usage and a recently constructed soccer/sports complex 
contributes to hotel demand. Citywide hotel occupancy increased 0.8% through 
October 2012, and the average daily room rate is up 3.3%. 

STRONG LOCAL ECONOMY

Overland Park is the second largest city in the state of Kansas and located 
within the Kansas City metropolitan area. The region benefits from a deep and 
diverse local economy, an extensive transportation network, available land, and 
a well-educated workforce. Several Fortune 500 companies are located within the 
city. The financial services and professional and business service sectors 
account for a greater percentage of total countywide employment compared to the 
national average.

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