Approximately $11.6 Billion in Debt Affected
New York, January 17, 2012 -- Moody's Investors Service has downgraded by one notch all California tax
allocation bonds rated Baa2 and above. All California tax allocation
bond ratings remain on review for possible downgrade.
SUMMARY RATING RATIONALE
The downgrade primarily reflects near-term cash flow risks arising
from legislation recently upheld by the state supreme court that dissolves
all redevelopment agencies. Effective February 1, 2012,
every redevelopment agency statewide will be replaced by a "successor
agency" charged with winding down the redevelopment agency's
affairs. This wind-down includes the payment of existing
debts according to their terms. However, the implementation
and potential for varying interpretations of the new legislation incrementally
raises the risk that some debt service payments will not be made on a
timely basis.
Compliance with the requirements of the new legislative framework may
prove challenging, particularly in the near term as affected agencies
attempt to interpret the law and comply with its specified timelines.
Most significantly, in the new law County Auditor-Controllers
are given new auditing requirements to be met by July 1, 2012,
and on-going administrative responsibilities that may initially
conflict with existing bond indentures. The resolution of any such
conflicts according to the new law's property tax reallocation process
could take a substantial amount of time, and it is entirely untested.
The limited, one-notch downgrade across the Baa2-and-above
rating spectrum reflects the broad-based but modest nature of this
new risk. While Baa3-and-lower rated tax allocation
bonds also face this new risk, their overall risk profile remains
consistent with their current ratings.
While we believe that existing legal protections for contracts,
as well as the legislature's clearly stated intent in the new law,
almost certainly preserves tax allocation bonds' fundamental security,
our tax allocation bond ratings remain on review for possible further
downgrade. This continued review reflects the near-term
practical and potential legal challenges to implementing the new dissolution
legislation while maintaining tax allocation bonds' credit quality
above a minimum level. We expect that the promulgation of implementation
guidelines in the near future and the resolution of any conflicting interpretations
of the law should permit a reevaluation of these ratings within our standard
90-day timeframe.
STRENGTHS
• Successor agencies, which replace the dissolved redevelopment
agencies, remain explicitly obligated to honor existing bond contracts,
with recognition of legally pledged revenue streams, debt service
reserve funding requirements, and other performance requirements
in existing bond documents.
• While the mechanics of the new law may be problematic, the
legislature's intent to honor existing obligations is clearly stated
in the law.
• County Auditor-Controllers have generally indicated a very
strong willingness and abiity to comply with the new revenue allocation
requirements on a sufficiently timely basis to allow successor agencies
to meet existing debt service payment obligations.
CHALLENGES
• The law establishs an initial allocation of property tax revenues
that conflicts with existing bond documents, and the effectiveness
of the resolution process on a timely basis is uncertain.
• The timeframe for property tax disbursements is more restricted
than it had been previously, potentially resulting in mismatched
receipt and disbursement schedules over the course of a year.
• The new law's audit requirements and sheer complexity may
result in unexpected payment delays as legal and administrative clarification
is pursued.
WHAT COULD MAKE THE RATINGS GO UP
• Implementation of the legislation in a manner that clearly preserves
timely debt service payment and enables compliance with bond documents
• Legislative or judicial clarification that compliance with bond
documents takes precedence over other, apparently conflicting aspects
of the legislation
• In the long-run, assuming resolution of the legal
and practical cash flow uncertainties, a sustained resumption of
property tax growth
WHAT COULD MAKE THE RATINGS GO DOWN
• Implementation of the legislation in a way that does not preserve
timely debt service payment
• Continued legal uncertainty and conflict between the law's
requirements and compliance with existing bond documents
• Judicial clarification that compliance with bond documents is subordinate
or to be balanced against other objectives of the legislation
The principal methodology used in this rating was Moody's Analytic Approach
To Rating California Tax Allocation Bonds published in December 2003.
Please see the Credit Policy page on www.moodys.com for
a copy of this methodology.
REGULATORY DISCLOSURES
Although this credit rating has been issued in a non-EU country
which has not been recognized as endorsable at this date, this credit
rating is deemed "EU qualified by extension" and may still
be used by financial institutions for regulatory purposes until 30 April
2012. Further information on the EU endorsement status and on the
Moody's office that has issued a particular Credit Rating is available
on www.moodys.com.
For ratings issued on a program, series or category/class of debt,
this announcement provides relevant regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides relevant regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides relevant regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the
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parties involved in the ratings and public information.
Moody's considers the quality of information available on the rated
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a rating.
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the lead rating analyst and to the Moody's legal entity that has issued
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Dari Barzel
VP - Senior Credit Officer
Public Finance Group
Moody's FIS Domestic Sales Office - San Francisco CA
One Sansome St. Suite 3100
San Francisco, CA 94104
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Eric Hoffmann
Senior Vice President
Public Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
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JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
MOODY'S DOWNGRADES CALIFORNIA TAX ALLOCATION BONDS DUE TO NEAR-TERM CASH FLOW RISKS ARISING FROM REDEVELOPMENT AGENCIES' IMPENDING DISSOLUTION; ALL TAX ALLOCATION RATINGS REMAIN ON REVIEW FOR POSSIBLE FURTHER DOWNGRADE
