|[October 30, 2013]
Fitch Rates Philadelphia School District's Bank Bonds 'AA-', Underlying 'BB'; Outlook Negative
NEW YORK --(Business Wire)--
Fitch Ratings affirms the underlying 'BB' rating to bank bonds
corresponding to the following Philadelphia School District, PA (the
district) variable rate general obligation (GO) bonds:
--$75 million GO refunding bonds, series G of 2010.
Additionally, Fitch Ratings assigns an underlying 'BB' rating to the
following district variable rate GO bonds:
--$75 million GO refunding bonds, series H of 2010.
All of the bonds have an 'AA-' enhanced rating based on the Pennsylvania
School District State Intercept Program (the program).
The Rating Outlook for the state's program is Negative, reflecting the
Negative Outlook on the Commonwealth of Pennsylvania's GO bonds. The
Rating Outlook for the underlying district rating is also Negative.
The ratings are being assigned in connection with the execution of
reimbursement agreements by PNC (News - Alert) Bank, National Association (PNC) for
series G of 2010 and by Royal Bank of Canada (RBC) for series H of 2010
pursuant to which PNC and RBC will issue letters of credit supporting
the above-referenced bonds. The series H of 2010 bank bonds were
previously part of series G of 2010 and are being split out with the
current letter of credit issuances.
KEY RATING DRIVERS
WEAKENING UNDERLYING CREDIT PROFILE: The downgrade of the underlying
rating largely reflects the continued deterioration of the district's
already tenuous financial position.
UNCERTAIN PROJECTIONS: The district's plans to achieve structural
balance rely heavily on its continued ability to achieve dramatic
expenditures savings, particularly gaining significant negotiated
concessions from the teacher's union. Fitch believes the level of
cooperation needed to fully realize these plans will likely not be
forthcoming, resulting in continued negative operations and increased
LIMITED ABILITY TO RAISE REVENUE: Fifty-seven percent of the district's
funding is tied to state sources, and raising locally generated revenue
requires state and city council approval.
ELEVATED DEBT LEVELS: The district's overall debt burden is high
relative to the tax base, although annual debt service expenditures
consume a moderate share of the district's operating budget. Payments
for other long-term liabilities are modest but growing.
STABLE SERVICE AREA: Demographic and economic indicators are weak,
although the city's economy is anchored by the presence of several large
healthcare and higher education institutions.
SOUND INTERCEPT PROGRAM: The enhanced, programmatic 'AA-' rating is
based on state law governing the program, which requires the withholding
of state appropriations and their direct payment to bondholders or their
SOLID COVERAGE: For fiscal 2014, budgted commonwealth subsidies to the
district cover annual debt service obligations, including short-term
debt, by 3.45 times (x), above the 1.25x required for eligibility under
Fitch's criteria for the use of this intercept program's rating.
Coverage has increased over past levels due to a reduction in the
district's short-term debt.
COST-CUTTING PLAN IMPLEMENTATION: Failure to implement the additional
level of cost-cutting measures needed to avoid further deterioration in
its financial position would likely lead to a further downgrade.
Based on a review of the terms governing bank bonds specified in the
reimbursement agreements, it is Fitch's opinion that the incremental
risk associated with bank bonds does not have a material impact on the
district's long-term credit rating. Fitch believes that should the
interest rate become unmanageable, the district would be able to secure
market access to issue fixed rate bonds to refund the above-referenced
bonds by using the state intercept program.
For more information, see Fitch's press release 'Fitch Downgrades
Philadelphia School District Underlying Rating to 'BB'; Outlook Remains
Negative' Oct. 11, 2013, available on Fitch's website at 'www.fitchratings.com'.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's
Tax-Supported Rating Criteria, this action was additionally informed by
information from Creditscope, University Financial Associates,
S&P/Case-Shiller Home Price Index, IHS (News - Alert) Global Insight, National
Association of Realtors, and Property and Portfolio Research.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria
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DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING
THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS.
AVAILABLE ON (News - Alert) THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'.
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