Fitch Assigns Denton ISD, Texas' V-R School Buildings Bonds 'AA-/F1+'

Business Wire, Jan 24, 2005

NEW YORK -- Fitch Ratings assigns a rating of 'AA-/F1 ' to the $46,500,000 Denton Independent School District, TX variable-rate unlimited tax school building bonds, series 2005-A. The 'AA-' long-term rating reflects Denton Independent School District's (Denton ISD, or the district) conservative financial management, healthy reserve levels, and large and growing debt burden. The 'F1 ' short-term rating reflects the liquidity support in the form of a standby bond purchase agreement (SBPA) issued by Bank of America, N.A. Additionally, the 'AA-' long-term rating on the district's $369.9 million of outstanding unlimited tax school building bonds is affirmed. The bonds are scheduled to be sold through a negotiated sale by Lehman Brothers on or about Jan. 25, 2005. The district plans to enter into an interest-rate swap for the bonds with Bear Stearns Financial Products Inc. and UBS AG. Swap and termination payments will be on parity with bond payments. The Rating Outlook is Stable.

The SBPA provides for the payment of the purchase price of tendered bonds during the initial- and variable-rate modes in the event the proceeds of a remarketing of the bonds following a tender are insufficient to pay the purchase price. The SBPA is sized to provide for the entire principal amount of the bonds and 270 days of interest at the maximum interest rate of 8% and will expire on Sept. 1, 2010, or upon the occurrence of other events of termination, according to its terms. The remarketing agent for the bonds is Lehman Brothers. The bonds are expected to be delivered on or about Feb. 15, 2005.

The bonds will bear interest at the weekly rate and pay interest on the first business day of each month commencing on March 1, 2005. The bonds may remain in the weekly rate mode or may be converted to a term-, flexible- or fixed-rate mode. Holders may optionally tender their bonds with the required prior notice to the tender agent, JPMorgan Chase Bank, while the bonds bear interest in the weekly and term rate modes. Bonds are also subject to mandatory tender: upon the conversion of the interest rate mode; at the end of each flexible-rate period; upon the expiration, termination, or substitution of the SBPA, unless such substitution will not cause a reduction or withdrawal of the rating on the bonds. Fitch's short-term rating on the bonds will expire upon any expiration or termination of the SBPA.

The bonds are direct obligations of the district, payable from and secured by a continuing direct ad valorem tax levied against all taxable property within the district, without legal limitation as to rate or amount. Bond proceeds will be used to finance the construction of district facilities and to pay issuance costs.

Steady increases in district taxable assessed valuation (TAV) have helped offset the rise in operating and capital needs generated by a growing enrollment base. Rapid enrollment continues, pressuring design capacity of facilities, and requiring ongoing construction and additional debt issuance. The prospect of significant additional residential development suggests that this trend will continue and that capital and operating pressures will not abate any time soon. Despite these pressures and the financial constraint imposed by the state-mandated operations and maintenance (O&M) tax levy cap, Fitch expects the district to maintain its favorable financial position.

Denton ISD is located approximately 35 miles north of both Dallas and Fort Worth in Denton County. Current enrollment is approaching 17,000, an increase of more than 6% from fiscal 2004. Enrollment projections call for even higher rates of growth, an average of 8.5% annual increases in student population is forecast through fiscal 2009. In tandem with enrollment gains, the district has recorded annual double-digit TAV growth since 2000. For fiscal 2005, TAV jumped more than 11% from the prior year, following a comparable increase in the prior year. With only 40% of the district currently developed, Denton ISD anticipates steady growth for the foreseeable future.

The district's direct debt load is increasing, and at $3,400 per capita and nearly 6% of market value, the direct debt burden is high. Overall debt ratios are higher, reflecting the district's share of overlapping debt, including the City of Denton. Principal repayment is slow due in large part to the lengthy amortization schedule and the significant amount of capital appreciation bonds issued as part of prior district borrowings. While additional borrowings are expected to accommodate enrollment growth, Fitch will consider stabilized or improved debt ratios as a positive credit consideration.

Despite the capital and operating challenges associated with enrollment growth, financial performance remains favorable. The district has recorded operating surpluses in each of the past five fiscal years. Fiscal 2004 results outperformed the budget and generated net income of $3.5 million. The total general fund balance stood at nearly $29 million, representing 28% of expenditures and transfers out. The large reserve levels are also important to meet cash flow needs, as the district is heavily reliant on property taxes for support.