Fitch Rates $55MM Indiana Fin Auth Lease Appropriation Bonds (Stadium Proj) Ser 2008A 'AA/F1+'

July 18, 2008 6:22 PM EDT

NEW YORK--(BUSINESS WIRE)--

Fitch Ratings assigns a rating of 'AA/F1+' to $55,000,000 Indiana Finance Authority (the authority), lease appropriation bonds (Stadium Project), series 2008 A. Fitch also affirms at 'AA' approximately $3 billion of Indiana's appropriation debt. The Rating Outlook is Stable.

The long-term 'AA' rating and Stable Outlook on the above-cited bonds is based on the Authority's long-term credit quality. The short-term 'F1+' rating on the bonds is based on the liquidity support of a standby bond purchase agreement (SBPA) provided severally by: (1) RBS Citizens, National Association, D/B/A/ Charter One, as administrative agent and one of the banks, whose pro rata share of the commitment will be 54.9%; (2) JPMorgan Chase Bank, National Association, with a 31.4% pro rata share, and (3) The Bank of New York Mellon, with a pro rata share of 13.7% of the commitment. The short-term rating will expire on the stated expiration date of the SBPA, July 22, 2011, unless such date is extended, or upon any earlier termination of the SBPA. Fitch's short-term rating expires on the expiration or termination of the SBPA.

The SBPA provides for the payment of the purchase price of tendered bonds during the daily rate modes and in the event the proceeds of a remarketing of the bonds following an optional or mandatory tender are insufficient to pay the purchase price. The SBPA is sized to provide for the entire principal amount of the respective series of bonds that each supports, plus interest coverage of 37 days calculated at a maximum interest rate of 15%, based on a year of 365 days. The Bank of New York Mellon Trust Company, N.A., as trustee, is required to give notice to the bank in the event that remarketing proceeds are insufficient to pay the purchase price for tendered bonds. The remarketing agent for the bonds is JPMorgan Securities Inc. The bonds are expected to be delivered through DTC on or about July 24, 2008.

The bonds initially bear interest in the daily rate, but may also be converted to a weekly, flexible, term, auction or fixed interest rate mode. While the bonds bear interest in the daily rate mode, interest will be payable on the first business day of each month, commencing Aug. 1, 2008. Holders of bonds bearing interest in the weekly or daily rate modes may tender their bonds for purchase upon delivery of prior notice to the remarketing and tender agents.

Bonds are subject to a mandatory tender: (1) on each interest rate mode change date (except between the daily and weekly rate modes); (2) upon the expiration or earlier termination of the SBPA; (3) on any substitution of the SBPA, and (4) in the daily and weekly rate modes, on any business day specified in a notice from the Authority, not less than 20 days after the trustee receives such notice. Optional and mandatory redemption provisions also apply to the bonds pursuant to the terms of the documents.

The 'AA' long-term rating is based on the state of Indiana's lease/appropriation credit, the importance of the stadium and convention center project to the state, and strength of the lease provisions. Indiana does not issue general obligation debt, rather meeting a bulk of its capital needs through debt issuance by the authority, which by its creation in 2005 consolidated debt issuance for the state. Low debt is the state's principal credit strength and, since all debt is appropriation-backed, legislative approval is required for projects and financings, including annual appropriation of lease payments. The state's net tax-supported debt is just below $3 billion, which equates to a low 1.4% of estimated 2007 personal income. While the state's Public Employees' Retirement Fund remains nearly fully funded, the closed State Teachers' Retirement Fund, with an unfunded actuarial liability of $10.3 billion as of June 30, 2007, is only 45% funded. Although diversification has occurred, the state's economy remains considerably concentrated in manufacturing, exposing the state to economic downturns. Further, the state's improved financial position could be pressured ultimately by the assumption of local costs, particularly education, as part of the recently enacted property tax reform.

In recent years, solid revenue growth enabled the state to surpass conservative revenue estimates and build balances. Fiscal 2007 general and property tax relief fund revenues rose 4.7% over the prior year and the state ended the biennium with $881.5 million or nearly 7% of revenues in combined fund balances, including the rainy day reserve. Midway through the current biennium, state operating revenues rose 2.4% over fiscal 2007, just above estimate, on stronger than expected personal income tax performance. The sales tax grew 2.9%. Based on fiscal 2008 actuals, state revenues need to rise 1.8% in fiscal 2009 to meet the budget. The state anticipates ending the biennium with combined balances of nearly $875 million, or approximately 6.5% of operating revenues, including a rainy day fund of $376 million.

The state recently enacted legislation toward bringing broad property tax reform to the state. Among a variety of changes under the legislation, the state assumes the remaining costs of primary and secondary education, in addition to other costs supported currently by local levies, funded by a 1% statewide sales tax increase, the retention and redirection of existing property tax relief funds, and wagering taxes from slot machines at horse racing facilities. The state estimates that new revenues will align closely with the assumed costs. Local property taxes are lowered, caps are placed on future increases, and an optional local income tax is permitted. If approved again by the legislature next year, the property tax caps will be considered as an amendment to the state constitution in November 2010.

Indiana's economy modestly grew out of the recessionary period early this decade, with some diversification, although a large manufacturing presence remains. Employment rose 0.5% in 2007, well under the nation's 1.1% rate, was on par with Indiana's performance over the last several years. More recently, employment declined 0.4% year-over-year in June 2008, fairing worse then the U.S. 0.1% rate of loss. Manufacturing earnings constituted 26% of Indiana's overall earnings in 2007, versus 12% nationwide, and just over 18% of employment as of June 2008. This sector is experiencing broad job losses, particularly in primary metals and transportation equipment, down 3.5% and 6.2%, respectively, in June 2008. State unemployment rate rose notably to 5.8% in June 2008, above the U.S. rate of 5.5%. The state's education and health sector rose rising 1.8% in June 2008 year-over-year. Total employment in the Indianapolis MSA, with its more diversified base, faired better than the state and U.S., growing 0.5% over the same period.

The bonds are being issued to fund construction of a new 63,000-seat stadium where the Indianapolis Colts National Football League franchise will play. Ultimately, the security for the bonds rests with the biennial state lease appropriation of rental payments due upon project completion. The state expects that earmarked tax revenues will be sufficient to pay debt service, and general fund revenues will not be necessary. The project is anticipated to be completed on time in August 2008.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 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.

Source: Fitch Ratings

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