OREANDA-NEWS. Fitch Ratings has assigned an initial public rating of 'AA-' to the following special tax bonds to be issued by the Birmingham-Jefferson Civic Center Authority (the BJCC):

--\$37,210,000 special tax bonds, tax-exempt series 2015-A;
--\$7,570,000 special tax bonds, taxable series 2015-B.

The bonds will be sold via negotiation during the week of February 23. Bond proceeds will provide approximately \$19.8 million for the acquisition and construction of certain capital improvements to the authority's facilities. The remaining proceeds will current refund the BJCC's outstanding series 2005 special obligation revenue bonds (tax-exempt) and series 2011 special tax bonds (taxable) for debt service savings.

The Rating Outlook is Stable.

SECURITY

The bonds are limited obligations of the authority payable from a first lien on a 3% special beverage tax on alcoholic beverages and a 3% special lodging tax collected throughout Jefferson County (the county), and payments in lieu of taxes (PILOT) related to certain rental, sales, lodging, beverage, and tobacco transactions at various facilities owned and operated by the BJCC. The bonds are additionally payable from a subordinate lien on several countywide special taxes, a 1% sales and use tax (of which the BJCC receives a minimum of \$1.2 million annually), a tobacco tax, and a 1% lodging tax. The lien on these taxes is subordinate to the prior pledge established in favor of the BJCC's refunding and capital outlay revenue bonds, series 1992 (not rated by Fitch).

KEY RATING DRIVERS

HEALTHY DEBT SERVICE COVERAGE: Pledged taxes collected in fiscal 2014 cover maximum annual debt service (MADS) by a strong 3.8x. Fitch's rating conservatively focuses on coverage excluding PILOT revenue generated from BJCC facilities, which still registers at a solid 2.4x. Coverage levels are adequately maintained under Fitch-designed stress scenarios.

GOOD ADDITIONAL BONDS TEST: The additional bonds test (ABT) requires 2.0x coverage of MADS from total pledged taxes, minimizing risk to overleveraging. The test includes PILOT revenue that are excluded by Fitch in its coverage analysis, and that make up about 30% of total pledged taxes. There are practical limitations to the issuance of debt, as total pledged taxes after the payment of debt service fund a meaningful 20% of the BJCC operating budget.

MANAGEABLE CAPITAL PROGRAM: The BJCC's capital needs appear affordable and to some extent discretionary with no significant outlays or construction projects on the horizon. No additional debt is contemplated beyond the proposed sale although Fitch expects additional bonds may be necessary over time to help serve the BJCC's mission.

DISCRETIONARY TAX MIX: Pledged taxes are largely derived from discretionary economic activities. Total pledged taxes have increased at a compound annual growth rate (CAGR) of 5.5% since fiscal 2005, but roughly 2% excluding the impact from the opening of a new Westin hotel and Uptown entertainment complex that drove a 50% increase in PILOT revenue in fiscal 2014. Declines during the recession were neither excessive nor prolonged.

REGIONAL ECONOMIC CENTER: Fitch anticipates fairly stable but not strong growth in pledged taxes reflecting Jefferson County's role as the economic and population center for the Birmingham-Hoover metropolitan statistical area (MSA), a diversified economy anchored in healthcare and education, and average income and employment metrics. The BJCC plays an important role in the performance of pledged taxes through its ownership and operation of a convention center, theater and concert halls, 19,000-seat arena, and two hotels, among other facilities.

RATING SENSITIVITIES

DEBT SERVICE COVERAGE: Given the limited nature of the legal pledge, Fitch views the level of debt service coverage from pledged taxes as the key rating sensitivity. A variety of factors may influence coverage over time, including but not limited to the performance of the regional economy and its continued attractiveness as a retail and travel destination, and the issuance of additional BJCC debt.

CREDIT PROFILE

BJCC is a public corporation created by the Alabama Legislature in 1965 to construct and operate a civic center in and for the benefit of the city of Birmingham (the city) and Jefferson County. BJCC is governed by a 9-member board that includes the mayor of the city of Birmingham, the president of the Jefferson County Commission and 7 members elected by the state legislature. The BJCC owns and operates, among other facilities, the Birmingham-Jefferson Convention Complex, a 19,000-seat sports and entertainment arena (Legacy Arena), a concert hall, theater, the Alabama Sports Hall of Fame, a 771-room Sheraton Hotel, a 294-room Westin Hotel, and an entertainment complex consisting of six restaurant tenants (Uptown).

STRONG COVERAGE FROM PLEDGED TAXES

Pledged taxes in fiscal 2014 totaled \$17.7 million, of which, \$3.9 million was derived from the 1% sales and use tax, tobacco tax, and a 1% lodging tax pledged on a first lien basis to the repayment of the BJCC's series 1992 bonds. The BJCC has covenanted not to issue additional bonds under the 1992 resolution for any purpose (the series 2015 bonds are being issued pursuant to a new indenture). The series 1992 bonds carry an annual debt service charge of \$2.4 million through final maturity in 2022. Coverage of MADS on the series 2015 bonds from fiscal 2014 total pledged taxes is 3.8x after taking into account the payment of debt service on the series 1992 bonds. Fitch estimates coverage of MADS at 2.4x excluding \$5.55 million of PILOT revenue. Fitch has conservatively excluded the PILOT revenue from its debt service coverage analysis, given our view there is a higher correlation between the availability of these revenues and the financial health of the BJCC (for more, see 'Bankruptcy Considerations' below).

PLEDGED TAX GROWTH DRIVEN BY OPENING OF NEW FACILITIES

The 2013 opening of the Westin hotel and Uptown spurred a 50% increase in PILOT revenue in fiscal 2014 and 13.5% increase in pledged taxes compared to prior year growth of 0.7% in fiscal 2013, 4.4% in fiscal 2012, and 4.0% in fiscal 2011. PILOT revenue is the second largest component of fiscal 2014 pledged taxes at 31%; lodging taxes were 46%, beverage taxes 12%, sales and use taxes 7%, and tobacco taxes 4%.

The BJCC has been engaged in litigation with the county since 2003 regarding the scope of events/transactions subject to the PILOT (the city had previously been party to the same litigation, but released its claims with respect to this issue). The BJCC and county are engaged in settlement negotiations; while the outcome of these discussions is difficult to assess Fitch believes the BJCC has taken appropriate action to insulate itself from an adverse ruling. The BJCC continues to collect the full share of PILOT, estimating the annual amount subject to the county claim at \$500,000, and a worst-case reimbursement to the county for amounts collected in violation of state law totaling \$5 million. The BJCC has escrowed \$8 million of the PILOTs it has collected since 2003.

FAVORABLE ABILITY TO WITHSTAND ECONOMIC CYCLES

The high level of debt service coverage upon issuance protects bondholders from periods of revenue decline in Fitch's stress scenarios. As previously stated, Fitch conservatively assumes no PILOT revenue in its coverage analysis. The special beverage and lodging taxes are increased at an inflation-based rate of 1.1%, with a revenue stress at 5-year intervals equivalent to 150% of each taxes' respective worst single-year loss over the last 10 years. The sales and use tax is held flat at the \$1.2 million statutory minimum, and the tobacco tax is reduced each year by the 10-year revenue CAGR of -3.7%. The resultant coverage of MADS from pledged taxes would remain solid at no less than 1.97x through final scheduled maturity. This stress results in a decline in total pledged taxes by about 9.6% at each 5-year stress interval, followed by a return to inflation-based patterns of growth (i.e., no recovery). Pledged taxes did not experience a particularly steep or prolonged decline during the recession, falling 3.8% and 5.5% in fiscal years 2009 and 2010, respectively, before returning to growth.

MANAGEABLE CAPITAL NEEDS

The BJCC updates its 5-year capital improvement plan (CIP) on an annual basis. The current CIP totals \$36.3 million through fiscal 2019. The CIP is largely comprised of repair and upgrade projects; the largest single component totals \$6 million for hotel room renovations at the Sheraton. The series 2015 bonds will finance approximately \$19 million of the capital plan with the remainder to be financed from surplus operating cash and reserves. Preventative maintenance on the BJCC's assets runs approximately \$1.5 million annually but this cost has grown in recent years as the BJCC has increased their footprint and responsibilities for upkeep.

BANKRUPTCY CONSIDERATIONS

Pledged taxes are levied pursuant to several acts of the Alabama Legislature for the explicit purpose of financing the operations and debt of the BJCC. The state laws charge the director of revenue of the county with the responsibility for collecting the pledged taxes on behalf of the BJCC, with the exception of the PILOT revenue which is collected by the BJCC when a retail, lodging, or other eligible transaction is consummated at one of its facilities. None of the taxes require action by the governing body of the county. Based on discussion with external counsel and the precedent established during Jefferson County's recent bankruptcy filing, Fitch believes the county has no legal right to divert or redirect the proceeds of the pledged taxes that it collects on behalf of the BJCC. The pledged taxes did not become part of the county's bankruptcy estate, and the pledged taxes were distributed to the BJCC without disruption during the entirety of the county's bankruptcy proceeding. Failure of the director of revenue to remit the taxes to the BJCC would be a violation of state law, pursuant to which the BJCC could seek an injunction or a writ of mandamus to compel the transfer of proceeds. Pledged taxes are distributed by the county director of revenue to the BJCC on a monthly basis and deposited to the debt service fund held by the trustee, with the balance becoming available for any lawful purpose of the BJCC.

Based on discussion with external counsel Fitch believes the BJCC, as a special purpose district, is not authorized to file for Chapter 9 bankruptcy protection, unlike cities and counties which are authorized to file under state law. If the BJCC were able to file based on subsequent legislation, Fitch believes there is a reasonable basis to conclude that the revenues pledged to repay the bonds are 'special revenues' under the provisions of Chapter 9. It is unclear whether the bondholders' lien on the pledged taxes would be subordinated to the necessary operating expenses of the BJCC, as provided for in Section 928 (b) of the Bankruptcy Code. This provision applies only to the extent special revenues are derived from system activities. The PILOTs are directly derived from events at the BJCC facilities; whereas the remainder of the pledged taxes is derived mainly from general sales and use, lodging, and tobacco transactions throughout the county. As such, Fitch's analysis of the pledged taxes and debt service coverage conservatively excludes the PILOT revenue.

BJCC CENTRAL TO REGIONAL TOURISM INDUSTRY

The BJCC's facilities play a key role in the regional tourism industry and thus the performance of the pledged taxes. The Birmingham area drew more than 4 million visitors in 2013 with an economic impact of \$1.5 billion. There are a total 145 hotel properties in the Birmingham area, with the BJCC's Sheraton and Westin the first and third largest by room number, respectively. The BJCC's convention center complex attracted 681 events in 2014 and more than 1 million visitors. BJCC's operating track record and its healthy cash balances position it to meet the maintenance and capital needs of its facilities. BJCC has generated an average of \$11.4 million in surplus cash from operations since fiscal 2010, inclusive of roughly \$1.5 million in annual preventative maintenance. As of Aug. 31, 2014, the BJCC had \$22.8 million of unrestricted cash and investments, equivalent to 145 days cash on hand. An additional \$11 million of liquidity will become available following the release of the cash funded DSRF securing outstanding debt to be refunded. Resolution of the PILOT litigation is expected to add another \$8 million in liquidity that is currently held in escrow.

REGIONAL ECONOMIC CENTER

The area economy has diversified over the past several decades and now includes a strong presence in healthcare, banking and professional services. Manufacturing remains prominent, particularly automotive, with Honda, Mercedes, and Hyundai each operating assembly plants within the MSA. The University of Alabama at Birmingham (UAB) is the largest employer with 23,000 jobs while UAB's medical school is the primary driver of the county's growing healthcare sector. The presence of the university has also fostered a high level of resident educational attainment and attractive labor pool for an active and expanding high tech hub in medicine, telecommunications, engineering and aerospace. Other leading employers include Regions Financial Corporation, AT&T, St. Vincent's Health System and Baptist Health System.

The population of the county has been fairly flat for some time, estimated at 659,479 in 2014 or 60% of the MSA total. County employment totals have contracted a moderate 0.3% and 0.6% in 2013 and 2014, respectively, reflecting declines in the government and trade sectors. The county's rate of unemployment fell to 5.1% in November largely due to labor force contraction. IHS, Inc. forecasts total non-farm employment in the Birmingham MSA to expand by a fairly low CAGR of 0.97% through 2020. County income indices exceed the state norms but fall somewhat below the national averages and have declined relative to those of the state and nation since 2007.