Fitch Upgrades Jacksonville, FL's Bank Bonds to 'AA'; Outlook Stable

Fitch Ratings upgrades the city of Jacksonville, FL's ratings associated with the following notes to 'AA' from 'AA-':

--Up to $75 million commercial paper (CP) notes, series A.

The rating is assigned in accordance with the issuance of a substitution letter of credit (LOC) facility to be issued with Bank of America.

The Rating Outlook is Stable.

SECURITY

The bank notes are payable from a lien on the city's share of the statewide local government sales tax (LGST) and city excise tax revenues subject to the prior payment of each respective senior lien revenue bond obligation. The city's excise tax revenues consist of its occupation license tax, utility service taxes and communications service taxes.

KEY RATING DRIVERS

The rating upgrade on the bank notes reflects the combined pledge of the local half-cent sales tax and excise tax revenues and the resilience of the security when compared to historical revenue losses and the modeled loss depicted by the Fitch Analytical Sensitivity Tool (FAST) in a moderate economic downturn. The rating also factors in limited risk to additional leverage of each pledged revenue at either the senior or subordinate level.

SATISFACTORY COVERAGE: Fiscal 2015 revenues cover maximum annual debt service (MADS) on all obligations (outstanding senior lien revenue bonds and subordinate bank bonds) by 2.2x. Fitch views the current level of cushion as strong when evaluated against the historical worst-year loss and the FAST output in a moderate economic downturn.

LOW LEVERAGE RISK: The city ordinance provides for additional CP note issuance with an additional bonds test (ABT) of 1.25x MADS. However, Fitch does not expect any additional issuance on parity with pledge revenues, as the LOC limits draws up to $75 million, and the LGST and excise tax revenues available after the payment of debt service are significant contributors to the funding of city operations. Each respective source represents about 9% of general fund revenues.

ECONOMIC RESOURCE BASE: Jacksonville is the most populous city in the northeast region of the state and the center of the Jacksonville Metropolitan Statistical Area. The city benefits from a diverse economy and employment that has expanded at a steady pace, providing sound growth prospects for pledged revenues.

RATING SENSITIVITIES

MATERIAL SHIFT IN REVENUE PERFORMANCE: The rating is sensitive to changes in the performance of the LGST and excise tax revenue streams.

LIMITED LEVERAGE: The rating on the bank notes assumes limited additional leverage of pledged revenues, if at all. Borrowing outside of this expectation could pressure the rating.

RATING CAPPED BY CITY IDR: The rating on the bank notes is limited by the city of Jacksonville's 'AA' Issuer Default Rating (IDR), as Fitch does not view the pledged local government sales tax and excise tax revenue as special revenues under section 902(2)(B) of the bankruptcy code.

CREDIT PROFILE

The city's economy is mainly supported by the trade, transportation and utilities sectors (21% of employment), education and healthcare (15%), professional and business services (15%), and leisure and hospitality (13%). The city also benefits from its central location with access to a major transportation network that includes roads, rail, sea and air transportation. The presence of the Jacksonville Port Authority enhances economic growth prospects, providing a strategic gateway for trade on the east coast and access for the military, with the presence of three major naval bases. City unemployment has improved from its recessionary peak (11.1% in 2010) with June 2016 unemployment of 5.0%. Resident incomes slightly lag the state average due to its largely service based economy, while median home values are about 30% below the state as reported by the Zillow Group.

Dedicated Tax Analysis

Pledged revenues have increased over the past 15 years at a sound 2.4% CAGR, and growth prospects are favorable. Fitch believes that the continued growth in population and economic activity will continue to fuel expansion in pledged LGST and excise tax revenues, and will at least trend in line with the rate of inflation going forward. Sales tax revenues have experienced more volatility during the recent economic downturn, but have improved with positive growth occurring annually since fiscal 2011; fiscal 2015 receipts surpassed pre-recession levels. Pledged revenues of about $179 million in fiscal 2015, after prior payment of senior lien obligations, covered estimated bank bond MADS by nearly 2.2x.

Revenue Stream Sensitivity

The LGST and excise tax revenues provide a strong security pledge for the bank notes. To evaluate the sensitivity of the pledged revenue stream, Fitch reviews both the revenue sensitivity results (with the application of a 1% national GDP decline scenario) and the largest decline in revenues over the period covered by the revenue sensitivity analysis. Based on the 15-year pledged revenue history, Fitch's analytical sensitivity tool generates a low 1.3% scenario decline in pledged revenues. The largest actual decline in historical revenue was 2% in fiscal 2007, reflecting the modest sensitivity of the combined pledged revenues. During the review period, the city's share of LGST revenues was more volatile, as evidenced by the largest consecutive decline of 22% from 2007 to 2010. LGST have since notably improved, with current revenues surpassing pre-recession levels. The city's excise tax revenues were more stable, with the largest decline less than 4% in 2012 -- tempering the overall volatility in LGST revenues.

Given current strong debt service coverage, pledged revenues could tolerate a 48% drop before bank bond coverage falls to 1.0x. This level of tolerance is equivalent to 38x of the FAST results and 25x the largest actual revenue decline in the review period. Fitch considers these results to be consistent with the 'aaa' dedicated tax assessment. When the same scenarios are measured assuming leverage to the 1.25x ABT, the coverage margin remains strong at nearly 22x the FAST results and 15x the largest consecutive decline -- both test results demonstrating 'aaa' results.

Issuing-Entity Exposure

Fitch believes that the pledged revenues would not be insulated from the general operations of the city in the event of a bankruptcy filing. As such, the rating on the bank notes is capped at the city's 'AA' IDR.

In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from Lumesis and InvestorTools.

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

Applicable Criteria

U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)

https://www.fitchratings.com/site/re/879478

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1011012

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1011012

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

View source version on businesswire.com: http://www.businesswire.com/news/home/20160830006507/en/