Fitch removes Reedy Creek bonds from negative watch; outlook now stable

Fitch Ratings Thursday removed the formerly Disney-controlled Reedy Creek Improvement District, Florida, from rating watch negative and assigned a stable rating outlook to its successor entity.

The rating agency was satisfied that legislation renaming the special district and putting it under control of Gov. Ron DeSantis’ appointees protects bondholders.

It affirmed the newly named Central Florida Tourism Protection District’s issuer default rating and the Reedy Creek’s approximately $686 million of outstanding ad valorem tax bonds at AA-minus.

Fitch said the removal from negative watch reflects the new law “clarifying the future operational profile of the district, including the preservation of its existing revenue raising authority and other powers allowing for servicing of its debt obligations.”

Fitch Thursday also removed $78 million in outstanding utility revenue and utility refunding bonds from negative watch, affirming their A rating and assigning a stable outlook.

The bill the Florida Legislature passed in February follows and implements a 2022 law dissolving older special districts, including Reedy Creek, after the Walt Disney Corp. came out against DeSantis’ so-called “Don’t Say Gay” law that censors public school discussion of sexual orientation or gender identity.

Reedy Creek was created to provide public services to what became the Walt Disney Company’s theme park empire near Orlando, and had effectively been controlled by the corporation as its primary landowner.

“While the new legislation makes key changes to the district, Fitch expects changes will not meaningfully diminish the district’s credit strengths supporting the current rating,” the rating agency said.

The district covenants to levy each year an ad valorem tax not to exceed 30 mills on all taxable property within the district sufficient to pay debt service on the bonds.

Fitch said the AA-minus rating reflects “the district’s strong operating performance, supported by prudent management practices and enhanced by substantial revenue-raising authority and high reserves. These strengths serve to mitigate the district’s limited expenditure flexibility and high debt servicing costs.”

On its ESG, or environmental, social and governance, evaluation, Fitch raised the district’s “Relevance Score for Rule of Law, Institutional & Regulatory Quality, Control of Corruption” to 3 from 5, “reflecting that the newly signed legislation resolves previous risks related to governmental effectiveness that Fitch had identified with the enactment of legislation in 2022, and that these issues now have a minimal impact on the rating.” The 3 score “means ESG issues are credit-neutral or have only a minimal credit impact on the entity,” the rating agency said.

Last week, S&P Global Ratings also revised the outlook on the district’s general obligation bonds to stable from developing. S&P also affirmed its AA-minus long-term rating on the outstanding GOs, saying the rating reflects the strong tax base, very strong collection rates and consistent financial performance.

S&P also said it evaluated the district’s credit risks associated with ESG.

“We view hurricane winds and inland flooding as representing the largest environmental risks to CFTOD over the long term as these acute events could lead to property tax revenue disruptions and economic effects depending on the severity, frequency, and duration,” S&P said. “We view its social and governance risks as credit neutral within our analysis. In regard to governance, the provisions of the recent legislation clarify the district’s governance structure, mitigating uncertainty around continued operations.”

The tax base concentration associated with the Walt Disney Co., which is rated A-minus with a stable outlook, “weighs as an asymmetric risk to the rating, but this risk is balanced by Disney’s long-standing position as one of the world’s premier tourist destinations and the essential services that the district provides,” Fitch said.

As of Jan. 1, 2022, the district’s tax base value was $13.4 billion while outstanding direct ad valorem debt totaled about $686 million.