Additional bonds tests regarding subordinate lien
debt would ideally be calculated using historical
sales tax revenue, divided by combined maximum
annual debt service payments of both senior and
junior lien debt. Some junior lien tests use only net
revenues after prior payment of senior lien debt,
and this can effectively dilute the additional bonds
test to a lower coverage multiple, unless the
required junior lien coverage multiple is high.
Analytically, Standard & Poor’s discounts this
method of coverage calculation and employs a com-
bined coverage ratio to evaluate junior lien debt.
Rating distinctions between junior and senior lien
are not automatic. Junior lien sales tax debt may be
rated on par with senior debt if the senior lien is
closed, or if no additional senior lien debt is other-
wise expected. No distinction may also be made if
combined current and expected future coverage lev-
els are so high that the importance of the lien posi-
tion becomes minimal given the resulting low risk
of insufficient coverage. On the other hand, if jun-
ior lien debt service coverage is significantly lower
than on senior lien debt, there could be a greater
rating distinction.
A debt service reserve fund that is fully funded
from a portion of bond proceeds, or through a
surety agreement with an investment-grade rated
entity, may add liquidity in times of stress but does
not enhance fundamental credit quality.
Most special tax bonds typically have an open
flow of funds, whereby revenues not needed to pay
debt service revert to the municipality. If excess rev-
enues are used to fund municipal operations, this
can be a disincentive to issue additional debt, as
payment of increased prior debt service might
restrict the monies available to fund municipal
operations. In such an example, a city might be
more likely to maintain high debt service coverage
even in the event of weak legal protections regard-
ing additional parity debt issuance. As such, an
open flow of funds may help support a higher sales
tax bond rating where the excess revenues are
essential to fund municipal operations, even when
the additional bonds test is not particularly strong.
Sometimes bond legal provisions specify a closed
flow of funds. In this case, excess tax revenues,
after payment of debt service, can typically be used
only for bond redemption. This provision can dra-
matically reduce average maturity and quickly raise
future coverage, if at the same time no additional
parity bonds are allowed. As such, a much lower
coverage could be accepted for an equivalent rating
in the initial years, if the risk is mostly in the out
years, when effective coverage could grow to a dra-
matically higher level with any sort of economic or
inflationary growth and debt is continuously
retired, or defeased early.
Certain specialized tax revenue streams entail
special considerations.Hotel Tax Bonds
Hotel tax bonds are secured by lodging room
fees—either a percentage of room rentals, or a
fixed tax per room. In practice, few hotel tax
bonds pledge purely hotel tax revenues: many also
include sales taxes on restaurant sales or car rental
fees, with similar tourism based analytical con-
cerns. Hotel tax bonds often fund capital facilities
for convention centers, which typically need regu-
lar renewal or expansion.
The approach to analyzing hotel tax revenue
bonds, and food and beverage tax revenue bonds,
follows the general special tax criteria. However,
because the hotel tax base is narrower and more
cyclical than broad revenues streams, such as gener-
al sales taxes, higher coverage levels and bondhold-
ers’ legal protections may be needed for equivalent
rating levels. Specific considerations for hotel tax
bonds include the issuer’s ability to generate hotel
taxes by attracting overnight visitors, the nature of
such visits (discretionary trips versus nondiscre-
tionary trips), historic hotel occupancy levels, and
planned expansion.
Additional key areas of the hotel tax bond analy-
sis include:
■The historic demand for hotel rooms within the
taxing jurisdiction;
■Occupancy rate trends;
■The number of room rentals; and
■Average room rates over a period of several
years.
A distinction also is made between the nature
of travel to a given community. Although discre-
tionary travel—vacations and business trips—are
affected by economic cycles, vacations exhibit
greater sensitivity. A feasibility study is helpful in
tracking demand trends. These studies typically
use historical patterns to estimate future tends.
Standard & Poor’s often finds analysis of histori-
cal hotel tax trends more valuable than predic-
tions for the future. A debt service reserve fully
funded from bond proceeds to the maximum
annual debt service takes on added importance
for a cyclical hotel/motel tax revenue bond issue,
as well as one secured by restaurant and beverage
taxes. Hotel/motel tax revenue bonds or food and
beverage tax revenue bonds also typically have a
higher range of 1.5x-2x for their additional bonds
test, unless the issuer’s hotel market is especially
broad and diverse. One of the strengths that hotel
tax and food and beverage tax revenue bonds
share with sales tax bonds is their response to
inflation. Pledged tax receipts and debt serviceSpecial Tax Bondshttp://www.standardandpoors.com 73