New York, January 17, 2012 -- Moody's has downgraded to B3 from B1 the rating on Southern California
Logistics Airport Authority's Subordinate Tax Allocation Revenue Bonds
(Southern California Logistics Airport Project), Series 2007 and
2008. The bonds are secured solely by allocated incremental revenues
from all twelve sub-areas of Victor Valley Economic Development
Authority's (VVEDA) Project Area, net of housing set-asides,
debt service on senior lien bonds, and other senior pass-throughs.
The downgrade affects approximately $51 million in subordinate
bonds.
RATING RATIONALE
The downgrade of the subordinate bonds is primarily based on the earlier
than anticipated debt service payment default, and the high likelihood
that defaults will continue for multiple years. On December 1,
2011, the Authority defaulted on $535,000 in principal
payments owing to a collapse in recent years of real estate values and
related revenues pledged to debt service. The revenue shortfall
was compounded by a defect in the debt service reserve fund, which
prevented its use for principal payments even though it was funded with
cash equal to the maximum annual principal and interest payment.
Also contributing to this downgrade is the uncertainty brought about by
the state's new legislation eliminating redevelopment agencies.
The legislation is unclear with regard to future repayment of defaulted
bonds if and when additional revenues become available from assessed valuation
(AV) growth, raising questions about ultimate recovery. The
pledged annual incremental revenues securing the defaulted bonds have
not been sufficient to cover total debt service since 2011, and
fiscal 2011 debt service payments were made in full by relying on previously
collected incremental revenues.
While AV trends for the near term indicated high probability of shortfall
in meeting debt service requirements after exhausting available borrowable
resources and debt service reserves, the Authority expected to make
fiscal 2012 debt service payments from these sources. In light
of the new state legislation prohibiting redevelopment agencies from entering
into new agreements, the issuer was unable to rely on borrowable
resources to bridge an expected liquidity shortfall for full repayment
of debt service due on December 1, 2011. Also, as noted
above, the trustee subsequently discovered it was unable to use
the debt service reserve fund for principal payments owing to an apparent
editing error limiting their use to just interest payments.
The rating also reflects the various project areas' long-run
potential for sufficient assessed valuation growth to recover unpaid debt
service in full, but the potentially long timeframe for that recovery.
In a scenario assuming 1% annual assessed valuation growth,
pledged revenues would be expected to reach sum sufficient debt service
coverage by 2022, and full recovery of missed principal payments
would occur by 2029. The B3 rating reflects the current defaulted
status of the bonds, the likelihood of continuing future defaults,
and ultimate bondholder recovery estimated at 95%.
Key Credit Strengths
• In the long run assessed values and incremental revenues likely
to increase
• Defaulted debt service will likely remain an obligation of the
redevelopment agency's "successor agency", with
previously unpaid debt service recovered over time
Key Credit Challenges
• Cash funded reserves not currently available for principal payments
• Continued AV declines possible
• Incremental AV to total AV ratio is very low and any future AV
declines would accelerate revenue decline
Outlook
The rating remains under review for a possible downgrade. This
reflects the uncertainties associated with the future pledged revenue
trends as well as recent state legislation which creates substantial uncertainty
over the tax allocation bonds issued by California redevelopment agencies.
What could move the rating UP
• Long-term growth of project area AV
What could move the rating DOWN
• Inability to use future excess tax increments to repay outstanding
defaulted debt.
• Decline in incremental revenues
• Decline in AV
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
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Kevork Khrimian
Vice President - Senior Analyst
Public Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
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Eric Hoffmann
Senior Vice President
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Releasing Office:
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MOODY'S DOWNGRADES TO B3 FROM B1 THE RATING ON SCLA'S SUBORDINATE NON-HOUSING TABS, FOLLOWING DEFAULT AFFECTING APPROXIMATELY $51 MILLION; THE RATING REMAINS ON REVIEW FOR POSSIBLE DOWNGRADE
