OREANDA-NEWS. Fitch Ratings has assigned an 'AA' rating to the following Denver, CO (the city) obligations:

--$233.3 million dedicated tax revenue refunding and improvement bonds, series 2016A;

--$144.1 million dedicated tax revenue refunding and improvement bonds, taxable series 2016B.

The bonds are scheduled to sell via negotiation during the week of March 21. Proceeds will be used to refund existing debt and finance improvements to the Colorado Convention Center and construction of the National Western Center campus.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from certain portions of the lodgers' tax, auto rental tax, and prepared food & beverage tax. The city plans to cash-fund a debt service reserve fund at closing pursuant to the standard three-prong requirement.

KEY RATING DRIVERS

STRONG ECONOMIC BASE: Denver's economy is fundamentally sound and diverse, serving as the hub of commerce for a large 10-county metropolitan area and as the seat of state government.

LARGE, EXPANDING HOSPITALITY SECTOR: Healthy gains in pledged revenues are fueled by Denver's strong draw as a tourist destination. Lodgers' and auto rental taxes are subject to economic volatility but benefit from the Denver's large convention and visitor industry which markets to both regional and national audiences.

SOLID COVERAGE: The new revenue pledge and additional bonds test is projected to provide strong MADS coverage and resiliency to economic downturns.

NO RATING CAP: The city's 'AAA' rating reflects its sound economy, healthy financial position and revenue flexibility, strong tax base growth, rapid debt amortization, and moderate carrying costs. However, Fitch considers the pledged revenue stream to be 'special revenue' under the U.S. bankruptcy code definition and therefore would not consider the city's general credit quality to be a limiting factor for the rating.

RATING SENSITIVITIES

PLEDGED REVENUE DECLINES: Large and sustained declines in collections and diminished coverage would put negative pressure on the rating.

CREDIT PROFILE

FAVORABLE LONG-TERM ECONOMIC PROSPECTS

Denver's economic diversity benefits from its role as the hub of a 10-county metropolitan statistical area (MSA) and the capital of Colorado. Denver's population (2016 estimated at 686,560) has grown at pace exceeding state and national averages. After posting recessionary job losses in 2009-2010, employment gains have outpaced labor force increases annually. As a result, the MSA's unemployment rate trended down steadily and registered a low 3.1% in Dec. 2015, which is below state (3.3%) and national (4.8%) averages.

NATIONAL WESTERN CENTER PROJECT

In Nov. 2015, 65% of Denver voters approved the permanent extension of the 1.75% auto rental and lodgers' taxes that were due to expire in 2023. Concurrently, voters also approved a $778 million debt authorization payable from excise taxes for the construction of the National Western Center (NWC) [a redevelopment of the existing National Western Stock Show Complex (NWSSC)], and the Denver Coliseum. The approved proposition also includes improvements to the Colorado Convention Center.

The $856 million NWC project (for phases I & II) will be funded mostly by Denver (78% of project costs) and the state of Colorado's Regional Tourism Act (14%). The first two phases will fund the major components of the project, including new stockyards and events pavilion, new equestrian center, and a Colorado State University animal hospital. The project also includes improvements along the South Platte River.

The city plans to issue an approximate par amount of $635 million in parity debt through 2020 for phases I & II. Such plans will provide project funding of $476 million for the NWC and $104 million for convention center improvements. Management will consider the issuance of the remaining bond authorization in the event pledged revenues exceed their 3% projected annual growth rate. The bond proposition also allows the city to use any legally available revenues as a repayment source other than property taxes. Management indicates the potential receipt of state tourism funds as one possible source.

TOURISM-SENSITIVE REVENUE PLEDGE

In addition to the new money bonds, the current offering refunds all outstanding excise tax bonds under a new pledge that adds two previously unpledged increments of auto rental tax (3.5%) and lodgers' tax (3.25%). The additional bonds test (ABT) is 1.75x (up from 1.25x) under the new bond ordinance. The new ABT relies solely on historical revenues.

Growing tourism and convention activity have led to solid growth in hotel rooms, including a 24% gain in downtown Denver from 2010 - 2015. Additional hotels currently under construction are projected to boost rooms in the MSA by 3,800 or 8.5% by 2017. Despite the large gains in hotel room inventory, occupancy and room rates have trended up steadily, aided by a record-high number of conventions and meetings.

However, Fitch notes the narrow nature of these pledged excise taxes, making them more vulnerable to economic swings. The lodger's tax makes up 50% of pledged revenue followed by the rental car tax at 36% and the food and beverage tax at 14%. Total pledged revenues declined by nearly 14% in 2009 before rebounding with strong annual gains, including a 16.4% increase in 2014. Preliminary 2015 pledged revenues increased by 8%.

SOLID MADS COVERAGE

The combined maximum annual debt service (MADS) for series 2016A and 2016B excise tax revenue bonds is covered 2.9x by audited 2014 revenues. Projected MADS for additional planned excise tax bond issuances through 2020 exhibits solid debt service coverage at 2.4x in 2023. The bonds are structured with a moderate ramp up to MADS in 2023 and a 30-year maturity.

SPECIAL REVENUE STATUS IS LIKELY

Fitch views the pledged excise tax revenue as special revenues under section 902(2)(B) of the bankruptcy code, which defines "special excise taxes imposed on particular activities or transactions" as special revenues. Therefore, the rating would not be capped by the city's ULTGO rating. There is no bankruptcy opinion that addresses the special revenue status of the pledged funds, and Fitch is not aware of a bankruptcy in which state-levied excise taxes were involved.