OREANDA-NEWS. Fitch Ratings has assigned an 'AA-' rating to the following state of Florida Department of Environmental Protection (DEP) bonds:

--$161.34 million DEP Florida Forever revenue refunding bonds, series 2016A.

The bonds are expected to sell competitively as soon as Aug. 1, 2016 for bids on 18 hours' notice.

Fitch has affirmed the following ratings:

--$1.03 billion in outstanding Florida Forever (FF) revenue bonds at 'AA-';

--$246.7 million in outstanding Everglades Restoration revenue bonds at 'AA-'.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by collections of the state documentary stamp tax, which is levied primarily on real estate transfers.

KEY RATING DRIVERS

STRONG GROWTH PROSPECTS: The pledged revenue stream, which is derived from economically sensitive real estate and other transactions, has historically been quite volatile. Revenues have resumed growth with recovery in the state housing market and Fitch expects continued strong growth in pledged revenues consistent with Florida's expanding economy.

REVENUE STREAM SENSITIVITY: Given expected limited leveraging of the pledged revenues and current high debt service coverage, the structure can absorb a decline in revenues expected to result from a moderate recession scenario. Coverage declined significantly but remained adequate through the recession.

STRONG LEGAL PROVISIONS: The rating reflects strong legal provisions supporting the bonds. The pledge includes all documentary tax collections and an effective additional bonds test of 2.58x maximum annual debt service (MADS). The state covenants to not reduce the allocated percentage of excise taxes securing the Florida Forever and Everglades bonds.

STATE CONTROL OF PROGRAM: The state controls future debt issuance and has flexibility regarding offerings under the programs. Legislative action during the recession to increase the revenues available to bondholders and recent legislative changes that strengthened the pledge are indicative of state support of the program.

RATING SENSITIVITIES

MAINTENANCE OF AMPLE COVERAGE: The rating is sensitive to maintenance of ample debt service coverage given significant volatility in pledged revenue. It is Fitch's expectation that Florida will continue to limit the leveraging of this revenue stream beyond what the additional bonds test permits, which is a key factor in the rating assigned.

CREDIT PROFILE

The state has levied documentary stamp taxes for more than 70 years and has issued land acquisition bonds of several types since 1964. The state began issuing Florida Forever bonds in 2001, pursuant to a constitutional amendment. The program provides for revenue bond issuance to acquire land and water areas for conservation, recreation, water resource development, and preservation. The state has authorized issuance under the Florida Forever program to a maximum of $5.3 billion with borrowing authorized annually. No more than $300 million of pledged taxes may be used annually for debt service on Florida Forever bonds. The current offering is a refunding for debt service savings.

Everglades Restoration revenue bonds, which since 2006 have had a parity lien on the documentary stamp tax revenues, fund the acquisition and improvement of land and water areas, including water supply and flood protection, under a $12.5 billion Everglades Restoration program, a joint federal, state, and local endeavor. Everglades Restoration bonds were approved by constitutional amendment in 1998, at that time payable from a junior lien on pledged documentary stamp tax revenues. In 2006, the state legislature elevated the Everglades Restoration bond lien to parity status with the Preservation 2000 and Florida Forever bonds. The amount of Everglades bonds authorized is currently $500 million.

INCREASING BUT VOLATILE REVENUES

The documentary stamp tax revenue that secures the bonds is derived primarily from real estate activity, with additional revenues coming from other transactions such as car loans. Documentary stamp tax revenues have historically been quite volatile and rose dramatically during the boom in real estate through the middle of the last decade, from $1.2 billion in fiscal 2000 to a high of $4.1 billion in fiscal 2006. As the economy entered recession, with the Florida housing market severely affected, these transactions and the associated documentary stamp tax revenues dropped precipitously.

Revenues bottomed out in fiscal 2010 at $1.1 billion before beginning to recover. Recent revenue growth has been quite strong, increasing 30.3% in fiscal 2013, 10.3% in fiscal 2014, and 17% in fiscal 2015. With recent strong revenue growth and the final maturity of parity Preservation 2000 bonds in fiscal 2013, debt service coverage has returned to former high levels. Fiscal 2015 pledged revenues provided 12 times (x) coverage of annual and peak debt service, which occurs in fiscal 2017.

Given Florida's strong economic resource base, diversification of the economy, and favorable migration trends, Fitch anticipates documentary stamp tax collections to continue to exhibit strong growth. Documentary stamp tax collections are not expected to reach prior high levels, given the nature of the previous housing bubble, but growth is expected to be strong with expansion in the Florida economy and continued recovery in the housing market.

RESILIENCY OF REVENUE STREAM

To evaluate the sensitivity of the dedicated revenue stream to cyclical decline, Fitch considers the results of the Fitch Analytical Sensitivity Tool (FAST), using a 1% decline in national GDP scenario, as well as assessing the largest decline in revenues over the period covered by the revenue sensitivity analysis. Based on a 15-year pledged revenue history, FAST generates a 6% scenario decline in pledged revenues. Pledged revenues could withstand a 61% decline, assuming full leveraging to the ABT, or 10.2x the scenario output, a very high level of resiliency.

However, revenues declined 75% during the height of the great recession. While the revenue stream, if fully leveraged to the ABT, could not absorb a similar decline and maintain adequate coverage of debt service, Fitch believes the state will continue to limit leveraging to well below the ABT. Further, the extreme decline experienced during the recession reflects the historic increase in housing related activity prior to the recession as well as the subsequent housing market crash, both of which are beyond current expectations. While continued volatility is expected, growth is expected to be more measured.

LIMITS ON ADDITIONAL LEVERAGE

Some concern over volatility in pledged revenues is mitigated by limits on additional borrowing both contained in the ABT and in state policy. The ABT takes into account debt service under both remaining programs and requires 1.5x coverage of MADS by the previous, smaller pool of pledged revenues (58.25% of pledged revenues; former pledge of 63.31% reduced by 8% for service fees). This creates an effective ABT of 2.58x when all revenues are considered. Additional bondholder protection is provided by covenants that ensure the revenues are not reduced, the state's degree of control and flexibility in issuing future debt, and the rapid amortization of outstanding debt.