Fitch Ratings has affirmed the 'BB-' rating on the Pennsylvania Economic Development Financing Authority's (PEDFA) $114 million of outstanding senior parking revenue bonds.

The Rating Outlook is Negative.

RATING RATIONALE

The Negative Rating Outlook reflects the narrow liquidity position of the parking system, which has been further challenged by reimbursements to Dauphin County and Assured Guaranty for debt service reserve draws. Although the parking system maintains healthy coverage on a senior basis, coverage is significantly lower for subordinate obligations. Resolution of the Negative Outlook will depend on full repayment of reserve reimbursements to Dauphin County and Assured Guaranty; recovery of parking demand to levels generating debt service coverage metrics in excess of covenant requirements; and an ability to address long-term capital needs.

The rating reflects the system's continued revenue underperformance and more constrained financial profile, which has led to increased risk related to asset preservation. In the short term, PEDFA's financial commitments are currently being met. However, the system's financial capacity to meet all future obligations, including reimbursements to Dauphin County and Assured Guaranty for draws on the debt service reserve fund and the funding of necessary maintenance capex, is vulnerable to further deterioration in the current economic environment.

The rating case reflects all-in coverage levels well below sum sufficiency in 2021, and below covenanted levels through the entirety of the forecast. The rating is further constrained by high leverage and total cost obligations, minimal liquidity, limited capital funding and uncertain rate-making flexibility to raise rates due to the political climate. Parking system cash flows and current fund balances remain narrow, providing limited internal resources for maintenance capex due to the low priority in the payment waterfall of capital reserve account replenishment.

KEY RATING DRIVERS

Dominant Position, Lagging Performance: Revenue Risk (Volume) - Weaker

The system includes 11 parking facilities with a total of 7,694 spaces and 1,260 spaces of on-street metered parking covering around 70% of public parking in Harrisburg. Strong non-compete covenants are expected to provide adequate market share protection. However, while the high degree of governmental jobs in the area provide some degree of demand stability by way of commonwealth parking contracts, the system still depends on university enrollment and economic growth in the Harrisburg area, and parking revenues are likely to mirror the tepid historical performance.

Rate-Making Authority: Revenue Risk (Price) - Midrange

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 to be needed to support revenue underperformance or increased lifecycle cost investments. Further, political risk may serve to limit rate-making flexibility.

Capital Plan Exhibits Risk: Infrastructure Development and Renewal - Weaker

The weaker assessment reflects the system's foreseen inability to generate excess cash flows to replenish the capital reserve account until the end of 2023. Repayments to the debt service reserves, which is expected to be complete by 2023, are prioritized higher than capital reserves in the system's flow of funds. Funded with bond proceeds, a $9.0 million capital reserve has been spent down to a current level of $2.5 million and remains at risk of full depletion.

Future funding of capex may rely on additional leveraging as internal funding is structurally dependent on excess cash flow following all other required deposits as the reserve is tapped. In the medium term, management expects to spend $600,000 annually until 2023, at which point cash flows are expected to be available to replenish the capital reserve.

Structural Features Have Weaknesses: Debt Structure - Weaker

While the 2013A bonds are senior ranking in the project's debt profile, 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, reserves for capital maintenance fall at the bottom of the cash flow waterfall, which present funding risks for ongoing capital investments. The system drew $1.7 million on debt service reserves in January 2021 and expects to draw on reserves for the next debt service principal payment in January 2022. Repayment of the advances is priority below current debt service in the cash flow waterfall. Senior tenor is long with a 30-year final maturity and subject to some capital appreciation. The parking system debt is fixed rate and fully amortizing.

Financial Profile

The system has an escalating debt service profile, including capital appreciation, which requires aggressive revenue growth to cover increasing debt service obligations as well as ongoing capital needs. All-in coverage (inclusive of subordinate debt) at YE 2020 (1x) fell below covenanted levels for the fourth time since 2013. Fitch's rating case forecasts senior-lien coverage to average 2.3x, based on a net revenue calculation. The average coverage of total project costs, including subordinated obligations and capital needs as well as debt service reserve draw reimbursements, is less than sum sufficient at 0.8x. Liquidity also remains a concern with minimal unrestricted cash and no operating reserves.

PEER GROUP

The closest publicly Fitch-rated peer is Miami Parking, rated 'A'/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 stronger debt service coverage ratio (DSCR).

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Material degradation of out-year parking and revenue expectations should the pandemic result in anticipated long-term economic impairment;

Continued trend of narrow or insufficient cash flow generation;

Foreseen depletion of the capital reserve;

Delays in reserve draw repayment beyond the period outlined in bond indenture, or inability to reach reserve reimbursement agreements with Dauphin County and Assured Guaranty;

System condition report indicating deteriorating assets and/or greater annual capital needs than those currently forecast.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

The Rating Outlook may return to Stable if the system re-establishes healthy debt service coverage in excess of the 1.25x covenanted levels over successive fiscal years in conjunction with healthier system liquidity.

Best/Worst Case Rating Scenario

International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

CREDIT UPDATE

The pandemic has had a sizable effect on PEDFA's 2021 revenues to date. Revenues through August 2021 are down 17% from pre-pandemic levels in 2019, and are 10% below budgeted expectations. Operating expenses are on budget, with cash flow being $1.7 million under budget. Management attributes the rise in Delta variant cases for having a negative impact on current and future revenues as well as forecasted recovery.

Monthly garage contract rates increased in March and management expects an additional increase to occur in 2022. The lease rate with the Commonwealth also increased in January. While ticket rate increases are subject to ordinance amendments with the City of Harrisburg, management is planning for one to occur in 1Q2022.

Management forecasts that fiscal 2021 (ending Dec. 31) senior DSCR on the Series A bonds will reach 2x and all-in DSCR net of senior opex for the Series A, B and C bonds will reach 0.8x. In 2021, management noted that PEDFA was able to make the July interest payment; however, they expect to draw approximately $1.7 million on the Series B and C debt service reserves for the Jan. 1, 2022 P&I payment. PEDFA is responsible for reimbursing the Dauphin County and Assured Guaranty for the reserve repayment within one year per the bond indenture. PEDFA is engaging in discussions with Credit Enhancers over potentially obtaining an extension. PEDFA expects to fully repay Dauphin County and Assured Guaranty for this debt service reserve draw by 2023.

Parking system cash flows and current fund balances remain very narrow and provide limited internal resources for maintenance capex as replenishment of the capital reserve account is low in priority in the payment waterfall. Given the anticipated nearly $2 million draw on reserves for the January principal payment on the subordinate liens, the system does not expect to generate excess cash flows to replenish the capital reserve account until after the reserve advances are repaid to Dauphin County in 2023.

FINANCIAL ANALYSIS

Fitch's rating case incorporates a 17% revenue decline in 2021 relative to 2019 based on YTD performance, with progressive recovery to 2019 revenue levels by 2023. In both of the cases, 2021 and 2022 Series B and C debt service includes reimbursements towards 2020 and 2021 shortfalls. Under this scenario, Fitch-calculated senior DSCR averages 2.3x throughout the forecast period, while all-in DSCR averages 1x, well below the rate covenant of 1.25x. Fitch's all-in DSCR calculation includes senior expenses pursuant to the trust indenture's flow of funds, but does not include subordinate expenses or capex needed to maintain the system. With the additional subordinate expenses and capex, DSCR is below sum sufficient, averaging 0.8x through 2025. PEDFA's all-in leverage is projected to reach 17.7x in 2021 and is expected to steadily drop down to 12x by 2025.

Fitch's downside case assumes 19% revenue decline in 2021 relative to 2019, followed by recovery to 2019 levels by 2024. Fitch-calculated senior DSCR averages 2.2x throughout the forecast period, while all-in DSCR (net of senior opex only) averages 0.9x, which is below the rate covenant. The all-in average DSCR (net of sub opex and capex) of 0.7x is less than sum sufficient. PEDFA's total leverage is projected to reach 18x in 2021 and is expected to steadily drop down to 12.4x by 2025.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.

RATING ACTIONSENTITY/DEBT	RATING		PRIOR

Pennsylvania Economic Development Financing Authority (PA) [Parking]

Pennsylvania Economic Development Financing Authority (PA) /Parking System Revenues/1 LT

LT	BB- 	Affirmed		BB-

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