EAST ALDINE – David Hawes, executive director of the East Aldine District, reports that Standard & Poors, the nationwide credit rating service, has upgraded its evaluation of the District. The result of this upgrade is that bonds that the District sells will have a lower interest rate, leaving a larger net cash reserve for use in the ongoing community projects that the District is undertaking.
The East Aldine Management District has been given a rating of AA- according to S&P Global Ratings. This is primarily due to: continued expansion and diversification of the district area; a very strong audited sales tax collections through 2017 and debt service coverage (DSC) at 3.5x MADS.
The raters view that nationwide sales tax revenue collections have exhibited relatively low volatility with no history of significant volatility at the local level; and the district’s general creditworthiness partially offsets the above credit strengths of the sales tax bond structure.
Some excerpts from the final S&P rating report follow:
S&P Global Ratings raised its long-term rating and underlying rating on East Aldine Management District, Texas’ series 2009 and 2016 tax-increment contract revenue bonds to ‘AA-’ from ‘A’ due to its criteria application of the “Priority-Lien Tax Revenue Debt,” published Oct. 23, 2018. The outlook is stable.
The bonds are a special obligation of the district, payable from, and secured by, a lien on and pledge of gross proceeds of a 1% sales-and-use tax levied within the district, plus an additional 1% special zone sales tax covering a portion of the district. A fully funded debt service reserve fund equal to the lesser of the maximum annual debt service (MADS) requirement or the maximum amount in a reasonably required reserve fund that management can invest without restriction as to yield further secure the bonds. We rate the bonds under our Priority Lien criteria, which factors in both the strength and stability of the pledged revenues, as well as the general credit quality of the municipality where taxes are distributed and/or collected (the obligor’s creditworthiness or OC).
While the district has maintained a very strong reserve position compared to the overall budget, we believe the overall operational revenue stream is concentrated with sales tax revenue representing the majority of the operating revenues.
While the operating revenues lack diversification, we believe the district’s budgetary practices are conservative enough to allow for flexibility to adjust to unfavorable budget performance and maintain very strong reserves. Additional strengths include the district’s good wealth and income levels and relatively low debt profile. Offsetting factors are the district area’s adequate market value per capita levels and concentration in the operating revenue base that can be susceptible to down cycles. The priority-lien rating on these bonds is limited by our view of the obligor’s creditworthiness and is constrained from being raised unless there is improvement in the OC.
Economic fundamentals: Strong-to-very strong The roughly 20.3-square-mile district is about 15 miles north of downtown Houston in an unincorporated part of Harris County. The district is home to approximately 55,000 residents in an older area of the county. Houston median household and per capita effective district buying incomes are, in our view, good at 104% and 103%, respectively, of national averages. Retail sales tax generators in the district include a Home Depot home improvement center, M.S. International Inc. (a distributor of flooring, wall, and countertop surfaces), and other retailers and manufacturing companies. The district also has significant business-to-business sales tax activity that officials estimate accounts for a significant amount of collections. Due to the size of the district and the relative size of its leading sales taxpayers, the district’s sales tax base, while still concentrated, has moderated with the 10 leading sales tax remitters making up approximately 32% of 2018 collections compared to 40% of total sales tax collections in 2016. Management does not currently have any concerns with its leading taxpayers due to the support and strength of consumer retail and manufacturing operations in the district. We expect future commercial and retail growth will continue to provide for stable growth in sales tax revenue over the next two years.
Management is currently projecting fiscal 2018 pledged revenue will provide approximately $10 million, or 4.14x MADS. The district conservatively budgets for revenues at $8.5 million, but we expect economic activity will continue to increase and provide very strong DSC.
The Texas Legislature created the district in June 2001 to enhance the physical, social, and economic well-being of the Aldine community. It is a governmental entity administered by an appointed nine-member, all volunteer board of directors.