Fitch Rates District of Columbia Deed Tax Revs 'A'; Outlook Stable

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings assigns an 'A' rating to the following District of Columbia deed tax revenue bonds:

--$24.915 million series 2010A;

--$26.415 million series 2010B;

--$3.46 million series 2010C (taxable).

In addition, Fitch affirms the following ratings:

--$32.4 outstanding deed tax revenue bonds at 'A'.

The Rating Outlook is Stable.

The bonds are expected to sell via negotiation during the week of Aug. 9.

RATING RATIONALE:

--Pledged revenues, derived from the economically sensitive housing market, have historically, and recently, exhibited significant volatility.

--Debt service has first priority with respect to annual disbursements from the allocated fund and will be funded one year in advance of when due. A debt service reserve funded at maximum annual debt service (MADS) is also present.

--Pledged revenues are projected to provide satisfactory debt service coverage of outstanding and presently contemplated bonds.

--The potential inability to replenish the debt service reserve fund exists due to annual debt service limitation, though this risk is mitigated partially by a funded supplemental reserve.

KEY RATING DRIVER:

--Maintenance of satisfactory coverage levels.

SECURITY:

The bonds are secured by the Trust Estate, which consists of all right, title and interest of the District in the pledged revenues, funds, and accounts under the Indenture. Pledged revenues include 15% allocations of real property transfer taxes and deed recordation taxes levied by the District.

CREDIT SUMMARY:

The underlying 'A' rating reflects satisfactory debt service coverage provided by pledged deed recording and real property transfer tax revenues, as well as solid legal provisions which call for debt service funding one year in advance and an additional bonds test (ABT) that incorporates a three-year historical element to offset risks due to rapid increases in District real estate values. The rating also considers that the pledged revenue stream is narrow and dependent on the value and volume of real property transfers and deed recordation activity in the District.

Bond security is derived from a 15% pro rata share of the district's real property transfer and deed recordation taxes dedicated to the Housing Production Trust Fund (HPTF). The act creating the HPTF allows the District to issue debt with annual debt service requirements not exceeding $6 million annually for the Northwest One Communities Project or $16 million annually in total for other like projects. While initial expectations had called for the full leveraging of this security by FY 2010, the bonds being issued at this time represent the only currently contemplated additional borrowing against this security. The ABT requires 1.5 times (x) coverage of MADS by the lesser of pledged revenues for the prior fiscal year or the average amount of pledged revenues for the past three fiscal years.

While the revenue stream had generally exhibited positive growth over the past two decades, it has in the past, and recently, sustained significant year-over-year declines; the largest decrease was 42% realized in FY 1991. Driven by the correcting housing market, total deed recordation and transfer collections in fiscal 2008 declined by 29.2%. Fiscal 2009 collections were down by an additional 33.3%, ultimately faring better than the District's earlier projected decline of 44.5%. Further declines are projected in fiscal 2010 and 2011 of 17.8% and 0.5%, respectively.

The District levies its real property transfer tax upon the conveyance of real property or interests therein at 1.45%, except on transactions involving residential property being conveyed for consideration of less than $400,000, in which case the transfer tax rate is 1.1%. The Deed Recordation Tax is a tax of 1.45% imposed upon recordation of deeds, including those concerning a lease or ground rent for a term (with renewals) of at least 30 years. Exceptions are also made in the case of recordation surrounding residential property with consideration of less than $400,000, for which the tax rate is 1.1%. Prior to FY 2002, the tax rates for both real property transfers and deed recordations were 1.1% for all properties, regardless of consideration. A temporary, unqualified increase of 1.5% was instituted for FYs 2003 and 2004, and the 1.45% noted herein is the result of a FY 2007 increase with the exceptions noted.

Fiscal 2009 pledged revenues provided 13.2 times (x) coverage of fiscal 2009 debt service, and projected fiscal 2010 revenues, reflective of continued deterioration, cover fiscal 2010 debt service by a still strong 9.9x. Projected fiscal 2011 revenues are expected to cover MADS on both the outstanding and new bonds by 3.9x. A debt service reserve fund is funded at MADS. However, replenishment of the debt service reserve fund, if it is tapped, is limited by the $16 million transfer cap for debt service.

Bond proceeds will finance a portion of the District's New Communities Initiative which provides funding for public housing and other related community development projects. Concurrent with the issuance of these bonds, indenture modifications related to the timing of the flow of pledged monies and the District's covenants will become effective. Fitch believes the modifications provide additional security strength.

Applicable criteria available on Fitch's web site at 'www.fitchratings.com' includes:

'Tax-Supported Rating Criteria', dated Dec. 21, 2009.

'U.S. State Government Tax-Supported Rating Criteria', dated Dec. 28, 2009.

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

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CONTACT:

Fitch Ratings, New York
Kenneth T. Weinstein, 212-908-0571
Karen Krop, 212-908-0661
or
Media Relations:
Cindy Stoller, 212-908-0526
Email: cindy.stoller@fitchratings.com

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