Fitch Ratings has affirmed the 'BB-' rating on the Pennsylvania Economic Development Financing Authority's (PEDFA) $112 million of outstanding senior parking revenue bonds.

The Rating Outlook has been revised to Stable from Negative.

RATING RATIONALE

The Outlook revision to Stable reflects the parking system's steady revenue recovery trends that have exceeded 90% of pre-pandemic levels since February 2022, benefitting from increased demand in conjunction with rate increases. Fitch believes this revenue level is sustainable to establish a more stabilized level of cashflow available for all debt service obligations in the near term.

The Stable Outlook also reflects execution of a corrective action plan agreement that extends the cure period for repayment of the January 2021 advance made to Assured Guaranty under the Series C debt service reserve contract to May 2023. Given the current recovery trajectory, management expects revenues to continue to improve and for parking demand to recover to levels generating sufficient cash flow to repay all outstanding debt service reserve advances within the next two to three years.

The rating reflects the system's underlying market and constrained financial profile given the elevated aggregate leverage, which has led to increased risk related to asset preservation should cashflows prevent adequate levels of fund asides for capital and maintenance needs. The system retains financial flexibility in the form of its surety contracts to meet short-term financial commitments. However, the system's financial capacity to meet all future obligations, including reimbursements to Assured Guaranty and Dauphin County for draws on the debt service reserve fund and the funding of necessary maintenance capex, is vulnerable to further adverse changes in the economic environment.

Although the parking system maintains healthy coverage on a senior basis, coverage is significantly lower for subordinate obligations and has not been in compliance with coverage covenants in recent fiscal periods. The rating case reflects all-in coverage levels of approximately 1x in fiscal 2022 and remains below covenanted levels through the entirety of the forecast. Fitch expects parking system cash flows and current fund balances to 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 government 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 had provided for large upward adjustments in the initial years, followed by the current mechanism of annual escalators thereafter. Rates currently remain competitive versus the national average, but could be exposed to demand sensitivity to the extent greater than inflationary rate increases were to be needed to support revenue underperformance or increased lifecycle cost investments. Further, the approval procedures for rate adjustments above the annual escalators could see political risks which may serve to limit rate-making flexibility.

Capital Plan Exhibits Risk: Infrastructure Development and Renewal - Weaker

The weaker assessment reflects the system's ongoing exposures to generate excess cash flows to pay-go fund major maintenance costs as well as to replenish the capital reserve account at appropriate levels. Repayments to draws on debt service reserves tied to the junior obligations are prioritized higher than capital reserves in the system's flow of funds. Funded with bond proceeds at the original financing in 2013, a $9 million capital reserve has been spent down to a current level of $2 million and remains at risk of full depletion absent a source of infusion, as management expects to spend $600,000 annually through 2024.

Structural Features Have Weaknesses: Debt Structure - Midrange (Revised from Weaker)

The midrange assessment reflects the senior ranking of the 2013A bonds in the project's capital structure and the parking system's fixed rate and fully amortizing debt profile. However, overall project structural features are lacking as shown through limited requirements for liquidity and leverage protections coupled with no established operating reserves and debt service reserves funded through surety policies.

In addition, reserves for capital maintenance fall at the bottom of the cashflow waterfall, which present funding risks for ongoing capital investments. The system drew $1.7 million and $2.0 million on debt service reserves in January 2021 and 2022, respectively. 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.

Financial Profile

The parking system has a high aggregate leverage and an escalating debt service profile, including capital appreciation structured bonds, which requires significant revenue growth to cover increasing as well as ongoing capital needs. All-in coverage (inclusive of subordinate debt) at YE 2021 (0.9x) fell below covenanted levels for the fifth time since 2013. Fitch's rating case forecasts senior-lien coverage to average 2.4x, 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 0.9x.

PEER GROUP

The closest publicly Fitch-rated peer is Miami Parking, rated 'A'/Positive. 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:

Parking activity and revenue generation that fall below rating case expectations;

Inability to sustain adequate funding levels for asset maintenance from the capital reserve account;

Continued periods of reserve draws for the subordinate obligations and failure to adhere to the current reserve draw reimbursements under agreements with both Dauphin County and Assured Guaranty.

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

Positive rating action is not expected in the near-term given the constrained financial profile coupled with uncertain capital needs and funding;

Over the medium term, sustained total coverage in excess of the 1.25x covenanted levels in conjunction with the demonstrated ability to build-up the capital reserve account and address expected capital needs would be supportive of a positive rating action.

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 parking system has demonstrated steady revenue recovery trends that have exceeded 90% of pre-pandemic levels since February 2022. As of July 2022, revenues net of parking tax is down 5.9% from pre-pandemic levels in 2019, and is 3.0% below budgeted expectations. Operating expenses as of June 2022 are 1.6% higher than budget, with cash flow being $205,000 under budget. The variance in operating expenses is attributed to higher legal and service fees associated with the Forbearance Agreement. Management forecasts that fiscal 2022 all-in DSCR net of senior opex for the Series A, B, and C bonds will be slightly above 1.0x.

The Commonwealth rates increased per the lease terms in 2022. In addition, the monthly garage contract rates increased in 2022, and meter rates increased in August 2021. Negotiations are taking place with the City of Harrisburg regarding an increase in ticket rates and the addition of meter spaces in the area around the new federal courthouse that would provide additional revenues.

Pandemic-related revenue shortfalls in 2020 led to draws on the Series B and Series C debt service reserve surety contract issued by Assured Guaranty to meet debt service requirements. On Jan. 1, 2021, the trustee drew $745,000 under the Series B debt service reserve surety contract issued by AGM and $932,000 under the Series C debt service surety contract issued by AGM to meet the $5.8 million principal and interest payment.

Pursuant to the Series B guaranty, Dauphin County subsequently reimbursed AGM for the 2021 Series B surety draw. PEDFA is responsible for reimbursing the Dauphin County and Assured Guaranty for the reserve repayment within one year per the bond indenture.

On March 15, 2022, Assured Guaranty filed a Notice of Default with a 30-day cure period for the 2021 Series C surety draw. The authority's asset manager provided Assured Guaranty with a Corrective Action Plan (CAP). The CAP projects that the debt service reserve draw will be cured 'within two or three years depending on the level of recovery.' The CAP was accepted by the Credit Enhancers, which extended the cure period to May 2023.

Similar to 2020, revenue shortfalls in 2021 led to additional draws on the Series B and Series C debt service reserve surety contract of $881 thousand and $1.1 million, respectively. Dauphin County reimbursed AGM for the 2022 Series B surety draw. The Series B and Series C surety draws must be repaid within 12 months of the advance. The current CAP and forecasts show full reimbursement of the 2021 and 2022 debt service reserve surety draws to both Dauphin County and Assured Guaranty by 2024. Assuming continued improvement in project revenues year-to-date, management does not expect further draws on the debt service reserve contracts.

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. 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 and Assured Guaranty.

FINANCIAL ANALYSIS

Fitch's base case incorporates management's forecast for the next five years. Revenues for 2022 are projected to recover to 95% of pre-pandemic levels, with 2023 exceeding the pre-pandemic levels. In both cases, 2021 and 2022 Series B and C debt service includes reimbursements toward 2020 and 2021 shortfalls. Under this scenario, Fitch-calculated senior DSCR averages 2.6x through 2026, while all-in DSCR averages 1.1x, 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 0.9x through 2026. PEDFA's all-in leverage is projected to decrease to 14.8x in 2022 and steadily drop down to 9.8x by 2026.

Fitch's rating case assumes a similar recovery level of revenues for 2022. All revenues streams are expected to reach or exceed pre-pandemic levels by 2023, except for garage revenues, which have seen a slower recovery. Total system revenues grow at a five-year CAGR of 6.3%. Fitch-calculated senior DSCR averages 2.4x throughout 2026, while all-in DSCR (net of senior opex only) averages 1.0x, which is below the rate covenant. The all-in average DSCR (net of sub opex and capex) of 0.9x is less than sum sufficient. PEDFA's total leverage is projected to decrease to 14.9x in 2022 and steadily drop down to 10.9x by 2026.

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.

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

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