Fitch maintains negative watch on Reedy Creek utility revenue bonds

Fitch Ratings is maintaining its negative rating watch on the Reedy Creek Improvement District, Florida’s combined utility system revenue bonds.

The ratings were originally placed on negative watch on April 22 after the Florida state Legislature approved a bill that could result in the dissolution of all independent special districts created before 1968. The bill's authors and fellow Republican Gov. Ron DeSantis made it clear that it is intended to punish Walt Disney Company (DIS), which Reedy Creek was created to serve, for its opposition to another bill targeting gay people.

Monday's report was limited to the A-rated $79.1 million of outstanding Series 2013-1, Series 2018-1 and Series 2018-2 utilities revenue and refunding bonds. The April 22 negative watch action also included $766 million of AA-minus rated ad valorem tax bonds.

Additionally, Fitch said Monday that it assessed the utility's standalone credit profile at 'a.' The standalone credit profile represents the credit profile of the utility on a stand-alone basis and not based on its relationship or credit quality of the general government of the district.

“The rating watch negative is maintained and reflects the lack of clarity regarding the allocation of the RCID's assets and liabilities, including the administration of revenues pledged to outstanding bonds in the event of dissolution,” the rating agency said in a statement. The bill was written and signed over a few days with little debate or analysis. “Fitch believes the mechanics of implementation of a dissolution scenario will be complicated, increasing the probability of negative rating action.”

According to the bill, the district could be re-ratified on the June 1, 2023 dissolution date. Fitch said that any re-ratification would most likely result in changes to Reedy Creek's governance and administrative structure while preserving the operating and fiscal powers that underpin the creditworthiness of the outstanding debt. That could lead to rating stabilization and the remove of the credit from negative watch.

RCID is about 15 miles southwest of Orlando and was created in 1967 by a special act of the state legislature in anticipation and support of the development of the Disney World Resort.

Disney (DIS) owns 67% of the land, which covers about 40 square miles, with 29% owned by the district, 3% by the state and about 1% by a few other landowners.

The 1967 legislation gave granted the district powers equal to a government to promote recreation-oriented projects, economic development and tourism-objectives. The legislature determined these served a valid public purpose.

It is governed by a five-member board of supervisors, which is elected by the landowners.

Reedy Creek also provides all utility services to businesses in the district. Electric service is the largest slice of the pie and accounts for a little over half of the utility's revenues, with the rest coming from water, sewer, solid waste and natural gas revenues.

Fitch said the A rating and the 'a' standalone credit profile reflect the district's low financial leverage and operating cost burden which is mitigated by concentrated revenues from a single corporate entity.

While the district provides utility services free from competitive forces and has the independent ability to adjust rates, Fitch's revenue defensibility assessment is limited to A as it incorporates the Walt Disney Company's (DIS) role in governance. It is also the main source of the district's revenue base.

Disney’s Fitch issuer default rating is A-minus. Fitch assigns a stable outlook to the credit. Disney (DIS) accounts for more than 80% of total utility system revenues.

“While passage of the dissolution bill lacks clarity regarding the district's intermediate and long-term operations, unless and until it is ultimately dissolved, Fitch expects the district will continue to operate as it has historically, providing utility services and collecting rates and charges for the payment of all obligations, including debt service,” the agency said.

“However, prolonged uncertainty with respect to the dissolution procedures, litigation or other factors that alter the security provisions and/or the likelihood for repayment from pledged revenues could lead to a downgrade of the ratings.”

S&P Global Ratings revised the outlook on Reedy Creek to developing from stable on April 22 due to the uncertainty about the district's fate.

Moody's Investors Service (MCO) also revised its outlook on the district to developing from stable and affirmed the Aa3 issuer and Aa3 limited tax GO ratings. Moody's also affirmed the A1 rating on Reedy Creek’s combined utility enterprise utility revenue bonds.