OREANDA-NEWS. Fitch Ratings has affirmed the 'BBB-' rating on the Pennsylvania Economic Development Financing Authority's (PEDFA) approximately $121 million capitol region parking system (the system) senior parking revenue bonds series 2013A. The Rating Outlook is Stable.

The rating reflects a modest size parking system that serves Harrisburg's central business district and is protected by strong non-compete covenants. A long-term lease with the Commonwealth of Pennsylvania (the Commonwealth) provides stable cash flows for the life of the senior lien obligations and produces gross debt service coverage of at least 1.20x through maturity. The rating is constrained by high initial leverage, minimal liquidity, uncertain long-term capital needs and funding sources and the need for higher rates that may impact demand and economic rate-making flexibility.

KEY RATING DRIVERS

Dominant Position, Lagging Performance: The Capitol Region Parking System covers virtually all on-street metered parking and a majority of the off-street public parking in and around Harrisburg's central business district. Strong non-compete covenants are expected to provide adequate market share protection and the high degree of governmental jobs in the area, along with the Commonwealth parking contract, should provide some degree of demand stability. However, future growth in parking revenues is likely to mirror the tepid historical performance.

Higher Parking Rates Necessary: Contracted rate schedules provide for large increases in the initial years, followed by annual escalators thereafter. Rates currently remain competitive versus the national average but could become uncompetitive to the extent greater than inflationary rate increases were needed to support revenue underperformance or increased lifecycle cost investments.

Structural Features Have Weaknesses: Structural features are lacking as shown through limited requirements for liquidity and leverage protections, no established operating reserves and debt service reserves funded through surety policies. In addition, reserving for capital maintenance falls at the bottom of the cash flow waterfall, which presents funding risks for ongoing capital investments if payments for subordinate obligations depend on county guarantee support. Senior tenor is long with a 30-year final maturity. Positively, all of the parking system debt is fixed rate and fully amortizing.

Some Risk in Capital Plan: Existing facilities are represented to be in satisfactory condition. However, there have been conflicting reports on the needs of the system. The authority's 40-year capital program totals $115 million with an additional $22 million budgeted for periodic meter replacement and technology upgrades. A $9 million capital reserve, funded with bond proceeds, is covering initial meter upgrades and garage technology improvements and achieving a state of good repair. Future funding of capital expenditures may rely on additional leveraging as internal funding is structurally dependent on available excess cash flow after all other required deposits.

High Leverage, Growth Dependent: Senior leverage is high at an estimated 9x net debt-to-cash flow available for debt service but migrates to a more modest 6x by 2023 in Fitch's rating case. The system has an escalating debt service profile and requires aggressive revenue growth to cover increasing debt service obligations as well as remaining capital needs. Fitch's rating case forecasts senior lien coverage to average 3.27x with a minimum coverage of at least 3.12x, based on a net revenue calculation. Liquidity remains a concern with no unrestricted cash and a remaining $6.9 million capital reserve balance that is at risk of full depletion in situations of modest revenue underperformance.

Peer Comps: Closest publicly Fitch-rated peer is Miami Parking, rated 'A'/Outlook Stable. This parking credit represents a larger city system in a very strong metropolitan statistical area and is financially protected with significantly lower leverage, stronger liquidity and a stronger debt service coverage ratio.

RATING SENSITIVITIES
Negative:
--Greater than expected elasticity of parking demand to planned rate increases that materially impacts total revenues could cause rating migration.
--Upward cost revisions to system capital needs versus current estimates or inadequate asset maintenance and reinvestment may result in negative rating action;
--Increased leverage that erodes financial flexibility could pressure the current rating level.

Positive:
--Upward rating mobility is not likely at this time, given the high leverage and low liquidity coupled with uncertain capital needs and funding.

SUMMARY OF CREDIT

There have been almost two full years of operations since the Capitol Region Parking System lease inception. Unaudited 2014 results were under budget, reflecting some difficulties transitioning the parking system operations from the city to a private operator. 2014 revenues were approximately 14% below budget, which was partially offset by operating expenses also being under budget. However, the all-in debt service coverage ratio for 2014 was only 1.22x (net revenues, inclusive of the Series B&C debt service), slightly below the 1.25x covenant (not an event of default). Coverage of the senior series 2013A bonds was a robust 3.43x (net of parking taxes). Year-to-date performance through Sept. 30, 2015 continues to be weaker than budget, but coverage of the senior bonds increased to a strong 3.58x.

All-in debt service coverage through Sept 30, 2015 was 1.13x and Fitch assumes year-end financials will result in 2015 coverage below the 1.25x covenant. The issuer has appointed a management consultant, as is required under the trust indenture given the covenant default in 2014, to make recommendations related to fees and operating expenses in order to bring financial results inline with the rate covenant. Fitch will continue to monitor any proposed changes to the rate structure. Even though coverage has been lower than expected, debt service payments are current on the series A,B,C bonds.

Difficulties in collecting enforcement revenues have been a primary reason that revenues have not met budget expectations. Procedural issues arose with the local court system that is in charge of processing overdue parking tickets, which delayed processing approximately 30-40% of 2014 tickets written and creating a meaningful impact on revenues. The procedural issue was rectified in Nov. 2014, but some processing delay persisted through 2015, resulting in a loss of ticket revenue. Management has stated that the ticketing and enforcement process has been fully fixed and tickets are currently being processed as expected. Additionally, a booting system is expected to be in place in 2016, which should help with meter enforcement.

The current capital reserve balance is approximately $6.9 million. Capital expenditures in 2015 focused on automating garage entrances, exits and pay stations. The 2016 capital plan is under development, but includes $1.2 million to finish automating garage entrance and exit systems. Approximately $2.4 million of capex has been deferred in 2014 through 2015, given that operating cash flows were under budget and management has prioritized capex based on adequate cash flow generation. Fitch will monitor PEDFA's capex plan and any additional significant deferrals of capital improvements that result in inadequate asset maintenance could pressure the rating.

Fitch's base case projects Fitch-defined senior net coverage to average 3.42x through 2025 with coverage never falling below 3.20x. Under Fitch's rating case scenario, Fitch-defined senior net coverage averages 3.27x through 2025 and never falls below 3.12x. These debt service coverage ratios include only senior expenses pursuant to the trust indenture's flow of funds and do not address subordinate expenses or capital needs of the system. Fitch's model has been updated to include unaudited 2014 and estimated 2015 results. Assumptions have been updated to include lower forecasted enforcement revenues and reduced garage revenue growth.

SECURITY

The series 2013A senior bonds are secured by a senior in payment gross pledge of the parking revenues (which are net of a 20% off-street parking tax to the city) generated by the capitol region parking system's facilities and meters.