OREANDA-NEWS. Fitch Ratings affirms the following ratings for the Village Center Community Development District, FL (VCCDD) bonds:

--Approximately $14.3 million utility revenue refunding bonds, Village Center Service Area (VCSA), taxable series 2014A at 'A+';
--Approximately $70.3 million utility revenue refunding bonds, Little Sumter Service Area (LSSA), taxable series 2014B at 'A'.

SECURITY

The bonds are payable by a senior lien on the net revenues derived from the district's ownership of the respective VCSA and LSSA water and sewer systems (the systems).

The Rating Outlook is Stable.

KEY RATING DRIVERS

ADEQUATE COVERAGE, HIGH LIQUIDITY: Both service areas' financial profiles reflect narrow debt service coverage (DSC) margins and low free cash flow (FCF), largely offset by exceptionally high liquidity.

AFFORDABLE RATES: Customer charges are very affordable, providing management with solid rate-raising flexibility. As approved by the board of supervisors, rates will increase by 2.5% annually through 2020.

AMPLE CAPACITY, SOLID OPERATIONS: Each system has ample supply, treatment and disposal capability. Daily operations are handled by a third party utility management firm that is widely employed across the state and nation.

HIGHLY SUCCESSFUL RETIREMENT COMMUNITY: The district is located within The Villages, one of the fastest growing retirement communities in the nation. The VCSA and LSSA serve roughly 40% of the overall Villages' population.

DEVELOPER RISK LIMITED: The commercial landowners within the district elect the district's board of supervisors. Currently four of the five members are either employed by or affiliated with the Villages original developer, who remains the majority landowner. Fitch believes the district's exposure to potential developer conflicts and/or financial difficulties is largely mitigated by statewide statutory constraints imposed on elected officials and independent oversight of district operations by a primarily resident-controlled organization.

LSSA DEBT BURDEN DRIVES NOTCH DISTINCTION: The LSSA system's debt load is expected to remain elevated for the foreseeable future relative to the VCSA's comparatively modest debt profile that is scheduled to fully amortize in 10 years.

RATING SENSITIVITIES

RATING STABILITY EXPECTED: Despite low coverage margins, near-term financial deterioration is unlikely given each service area's significant liquidity levels, approved annual rate increases, and limited capital needs.

CREDIT PROFILE

The Villages is a retirement community encompassing over 21,000 acres located primarily in Sumter County (implied general obligation [GO] rating of 'AA-' by Fitch) in central Florida, about 50 miles northwest of Orlando. A portion of the Villages spills over into Marion County as well as Lake County (implied GO rating of 'AA-'). Begun in the 1970's, the development has experienced extraordinary growth and currently contains over 55,000 homes and over 100,000 residents. The VCSA serves 17,588 people and is fully built-out, while the LSSA serves 24,090 people and is nearing full build-out. Combined, the service areas represent approximately 43% of the Villages' current population and 43% of its footprint.

SIMILAR SERVICE AREA CREDIT CHARACTERISTICS

The district serves as both the obligor and issuer of the series 2014A and 2014B bonds and governs the two distinct service areas that generate pledged revenues. The VCSA and LSSA serve residents in the northern portion of the Villages and provide pledged revenue securing the series 2014A and 2014B bonds, respectively. The customer bases of the two systems are almost entirely comprised of Villages' residents who share nearly identical economic and consumption characteristics. Likewise, the systems' operational profiles, governance structure, customer charges and capital needs are very similar if not identical. The primary difference between the two service areas is their financial and debt profiles.

GOVERNANCE AND MANAGEMENT

The district is a local unit of the special purpose government created in 1992 to provide administrative and financial services to other districts within the Villages. The district encompasses only 167 acres but owns and operates the VCSA and LSSA water and wastewater systems, various recreational amenities, and stormwater management facilities.

DEVELOPER-AFFILIATED BOARD RISK OFFSET BY LEGAL & STRUCTURAL CONSTRAINTS

The district is governed by a five member board of supervisors elected by the district's 16 commercial property owners. Each of the landowners is entitled to one vote per acre owned. At current, four of the board members are either directly employed by or are affiliated with the developer, who remains the district's majority landowner. The board is responsible for selecting a district manager to manage the district's day-to-day operations. The board composition raises the risk that any potential financial problems incurred by the developer could lead the board to take actions in the interest of the developer at the expense of bondholders.

However, Fitch believes such a scenario is unlikely. Board members, as elected officials, are subject to statutory standards of professional responsibility, accountability and disclosure, making it difficult for officials to take actions outside the parameters of the district's governmental responsibilities. In addition, an independent board, the Amenity Authority Committee, oversees the district's non-debt amenity-related spending, recreational facilities operations, debt issuance and other activities, thus providing an independent check on district operations.

VCSA: ADEQUATE MARGINS, HIGH LIQUIDITY AND LOW DEBT

The VCSA's DSC position has improved over the past five years with growing revenues and relatively flat annual debt service (ADS). Fitch-calculated DSC continued a solid upward trend in fiscal 2015 with 1.9x coverage. The system continued to boast exceptionally strong cash levels in 2015, with $11 million in unrestricted assets equating to over 1,500 days cash on hand (DCOH) and over 1,300 days' working capital. The VCSA's free cash (after paying for operations and maintenance and debt service) available to fund annual depreciation was high at 158% for fiscal 2015. Management's financial forecast predicts financial performance to remain sound through fiscal 2019.

The VCSA system's outstanding debt burden represents the full cost of the system's 1993 purchase price. The debt is scheduled to be fully paid off in 10 years and debt per customer was low at only $773 in fiscal 2015. The system's total debt burden is somewhat above average for the rating level at 48% of net plant and likewise ADS is slightly elevated at 29% of the system's gross revenues during fiscal 2015. Fitch believes that these metrics will steadily improve as debt declines and net system revenues improve marginally over time.

LSSA: LOWER MARGINS, STRONG LIQUDITY, HIGHER DEBT

The LSSA has comparatively poorer DSC at only 1.3x in fiscal 2015, in line with historical DSC levels achieved since fiscal 2010. Mitigating these low coverage levels is the LSSA system's exceptionally strong cash balances: $7 million in unrestricted cash in fiscal 2015 equating to 1,100 DCOH and 1,187 days of working capital.

The LSSA was purchased with debt more recently in 2003 and therefore has a comparatively higher debt burden that is not scheduled to be retired for over 20 years. Debt equaled net plant in 2015, while debt per customer was $2,739 and ADS carrying costs represented a high 52% of gross revenues. The LSSA's debt metrics are forecast to remain elevated for the foreseeable future.

NO NEW DEBT PLANNED

Fitch believes that each system's debt burden will continue to improve as the district has no plans to issue further debt. Capital improvement needs are modest and are anticipated to be funded entirely by working capital funds or reserves if necessary. The rating notch distinction between the two systems acknowledges the marked difference between the two systems' debt profiles. Fitch expects that over time the LSSA's debt position will more likely reflect the current debt metrics of the VCSA system at which point upward rating movement may be considered.

BOTH SYSTEMS HAVE AFFORDABLE RATES

The average resident of both service areas consumes between 8,000 and 11,000 gallons of water per month, nearly 70% of which is for irrigation. The water and sewer bills are paid first as part of a combined 'one-bill' system that also includes the Village's recreational amenity fees.

Annual collection rates for each system exceed 98%.
In fiscal 2016, the average VCSA resident pays $46.80 and average LSSA resident pays $51.70 for combined water and sewer services. These bills equate to roughly 1% and 1.1% of median household income (MHI), respectively, well below the Fitch affordability threshold of 2% MHI. The board has approved 2.5% annual rate increases for 10 years, beginning in 2010 and ending in 2020. This steady, predictable level of rate increase is projected to maintain rate affordability and revenue sufficiency going forward. Should increases above what has already been approved be required in the event of revenue shortfalls or additional spending needs, the board retains flexibility to amend the existing rate plan.

SOLID SHARED OPERATIONAL CAPACITIES

The VCSA and LSSA systems are separate utilities that provide water and wastewater services as well as reclaimed water for irrigation to distinct service areas within the Villages. Raw water is supplied locally through groundwater wells from the Floridan Aquifer. Consumptive use permits are regulated by the Southwest Florida Water Management District and are currently valid with potable supplies expected to be sufficient for the long term. Wastewater treatment is also sufficient for both systems' minimal needs, and the majority of potable water consumption is for irrigation purposes. The district's utility director oversees each utility's contract with a third party operational manager (Operations Management International, Inc.) to run the day-to-day system operations. Overall, each system is relatively new and the five-year capital improvement plan appears manageable.