Jan 15 Fitch Ratings downgrades to 'BBB-' from 'BBB+' its ratings on the following Howard Bend Levee District, Missouri (the district) securities: --$19,145,000 million levee district refunding and improvement bonds, series 2005; --$5,230,000 (Creve Coeur airport sub-area) levee district improvement bonds, series 2007. The Rating Outlook is Stable. SECURITY The bonds are special limited obligations payable solely from a special levee tax (SLT) against certain benefited properties. The amount of the SLT is proportionate to the benefits conferred upon each parcel. The bonds are also secured by deal-specific, cash-funded debt service reserves funds (DSRF) equal to the IRS standard. KEY RATING DRIVERS DOWNGRADE REFLECTS LIMITED CASH AVAILABLE FOR DEBT SERVICE: The downgrade reflects the limited cash available for debt service coverage outside of annual collections. While coverage is still sufficient, the diminished cushion and expectation of further drawdown of capital improvement cash provides less protection against downside risk and therefore reduces credit quality. MARGIN OF ADDITIONAL FINANCIAL FLEXIBILITY: The district has the authority to levy up to 1.2x coverage for annual debt service between its installment and maintenance levy. It currently levies a total SLT equal to annual debt service (1.0 times coverage). SIGNIFICANT TAXPAYER CONCENTRATION: Both series of bonds display considerable taxpayer concentration with the top 10 payers accounting for at least 70% of total collections. The number of taxpayers obligated to repay both series is also extremely limited. LIMITED ECONOMY: The district's economy is notably limited with gaming and agriculture representing the majority of economic activity within the district. WHAT COULD TRIGGER A RATING ACTION DECLINES IN TAX COLLECTIONS: Interruption in the timely payment of the SLT by top taxpayers would create a major cash flow disruption, which could apply further downward pressure to the rating. EROSION OF UNRESERVED CASH BALANCES: Further erosion of discretionary cash reserves may be cause for additional rating action. CREDIT PROFILE The district encompasses a 10.4 square mile area 20 miles northwest of St. Louis. It was incorporated in 1987 to protect and reclaim land from wash and bank erosion and water overflow. The district's board is comprised of five district property owners. HIGH TAXPAYER CONCENTRATION Taxpayer concentration is a significant credit concern. Hollywood Casino St. Louis (the casino) is the largest taxpayer for the 2005 series bonds and accounts for 37% of the total STL on those bonds; the top 10 taxpayers account for 70%. The top taxpayer for the series 2007 bonds is a trust which accounts for 18% of the total SLT, and the top 10 comprise 83%. The project subarea associated with the series 2007 bonds does not include the casino. Overall, the SLT is levied on 385 benefited properties associated with the series 2005 transaction and 148 benefited properties associated with the series 2007 transaction. SLT COLLECTION RISK The bonds are special limited obligations payable solely from an SLT levied on certain property in proportion to the flood abatement benefits for each parcel. The district is required to impose the SLT levy in an amount sufficient to pay debt service on the bonds. The district currently levies a total SLT equal to annual debt service (1.0x coverage). The district may levy up to 1.1x coverage for its SLT levy and an additional 10% emergency levy, providing up to 1.2x coverage. The district additionally imposes operating and maintenance levies which accounted for 20% of the district's levy in 2012 and which includes a small margin for uncollected taxes (3%-5% of total SLT levy) as part of its maintenance levy. SLTs are collected by the county and unpaid taxes result in a lien placed upon the delinquent parcel of land; this lien is subordinate to property taxes. Tax collection rates have exceeded 97% since 2007 through the recent economic trough. The district's ongoing operations are limited (as is the case with most special districts), with the bulk of total expenditures consisting of debt service. Aside from annual levies, the district reports approximately $900,000 on hand in cash reserves usable for debt service, representing approximately 40% of 2012 debt service. This amount is down from previous reviews and the reduced margin is the major reason for the downgrade. Fitch notes that the potential for cash flow volatility in cases of major taxpayer non-payment is an important credit weakness. During a period of extended non-payment, the district would need to seek a readjustment of the proportional benefits assigned to each parcel net of the delinquent taxpayer, and reallocate the tax on a pro rata basis based on the new proportional benefit assessment. This remedy is without legal precedent and the timeline for this remedy (as well as foreclosure) is uncertain. LIMITED ECONOMY The district's economy is notably limited, reliant predominantly on gaming and agriculture. The casino is the largest district employer with approximately 1,800 employees. Penn National Gaming Inc. recently purchased the casino for approximately $610 million in an all-cash transaction and announced it will invest approximately $61 million in updating and rebranding the facility. Some additional development within the district may occur due to the completion of improvements to nearby state highway 141.