McAllen Local Government Finance Corp., TX 2017 Bond Rating Lowered To 'AA' On Criteria Application

CENTENNIAL (S&P Global Ratings) April 15, 2019--S&P Global Ratings has lowered its rating on McAllen Local Government Finance Corp. (LGFC), Texas' subordinate-lien series 2017 contract revenue bonds to 'AA' from 'AA+'. At the same time, S&P Global Ratings has affirmed its 'AAA' rating on the Development Corp. of McAllen, Texas' senior-lien series 2018, 2017, and 2016 sales tax revenue bonds. The outlook is stable.
"The downgrade reflects the vulnerability of the subordinate bond's coverage, in particular, to be diluted through issuance of additional senior-lien debt," said S&P Global Ratings credit analyst Chase Ashworth. We rate the bonds using the application of our "Priority-Lien Tax Revenue Debt" criteria (published Oct. 22, 2018), which factors in the strength and stability of pledged revenue and the general credit quality of the municipality where taxes are distributed or collected, known as the obligor's creditworthiness.
A city-wide senior-lien pledge of a 0.5% economic development sales-and-use tax levied throughout McAllen for the benefit of the nonprofit economic development corporation secures the Development Corp.'s bonds. While the Local Government Finance Corporation's bonds are secured by a subordinate-lien pledge of the same 0.5% economic development sales-and-use tax, and are further secured by tax increment revenues derived from the city's Tres Lagos Tax Increment Reinvestment Zone (TIRZ). However, the 2017 contract revenue bond's legal provisions are only in respect to the pledged sales tax revenues, therefore, we rate to the sales tax pledge only.
The city-wide sales tax securing the senior series 2018, 2017, and 2016 sales tax revenue bonds and subordinate-lien series 2017 contract revenue bonds has experienced overall growth historically, despite deterioration in fiscals 2016 and 2017. Based on unaudited 2018 results, the pledged revenues have bounced back, demonstrated by a 6% increase from fiscal 2017, and is projected to continue growth at 2-3% annually, according to management. We believe additional senior-lien debt could be issued, given McAllen's expanding economy, leading to diluted coverage levels. However, given the current extraordinary coverage levels on both liens, a significant amount of debt would need to be issued for coverage levels to fall below levels we consider extraordinary.
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