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MOODY'S ASSIGNS A1 RATING WITH STABLE OUTLOOK TO SAN FRANCISCO REDEVELOPMENT FINANCING AUTHORITY'S 2011 TAX ALLOCATION REVENUE BONDS

07 Mar 2011

Approximately $782 Million of Debt Affected, Including Current Issue

Municipality
CA

Moody's Rating

ISSUE

RATING

Taxable Tax Allocation Revenue Bonds, Series 2011 A

A1

  Sale Amount

$30,975,000

  Expected Sale Date

03/28/11

  Rating Description

Tax Allocation

 

Tax Allocation Revenue Bonds, Series 2011 B

A1

  Sale Amount

$16,365,000

  Expected Sale Date

03/28/11

  Rating Description

Tax Allocation

 

Opinion

NEW YORK, Mar 7, 2011 -- Moody's Investors Service has assigned an A1 rating to the San Francisco Redevelopment Financing Authority's 2011 Series A and B Tax Allocation Revenue Bonds. Our A1 ratings on the outstanding bonds that benefit from the cross-collateralization described below are also affirmed. The outlook on these ratings is stable.

RATING RATIONALE

The current bond offering is primarily secured by the Authority's pledge of revenues derived from nine loan agreements between the Authority and the San Francisco Redevelopment Agency. Each of the loan agreements is in turn secured by the Agency's first lien pledge of tax increment revenues from the nine different project areas being funded by the bonds. The current loans, as well as those outstanding pertaining to prior issues, are cross-collateralized through a debt service reserve fund replenishment mechanism supported by ten of the Agency's twelve project areas. This cross-collateralization effectively allows the greatest weight of the credit analysis to be on the project areas' combined credit quality, as if it were a single project area rather than several separate areas. This consideration is a key, positive rating factor, since individually some of the project areas are quite small and their top taxpayers highly concentrated. On a combined basis though, the security for the Authority's revenue bonds remains above average for tax allocation debt. The area covered by the combined project areas is typical for a highly rated TAB, but the combined dollar amount of assessed value is extremely large. Debt service coverage is sound, though weakening moderately with this issue. The debt service reserve fund portfolio is a noted credit weakness as it includes a significant amount of below investment grade sureties; while the cross-collateralization is an important mitigating factor, as total debt service coverage decreases this reserve fund weakness becomes a more material credit negative.

The redevelopment agency has no authority to set tax rates or levy taxes and, therefore, any reduction in the project area's assessed valuation will directly reduce the amount of incremental property tax revenues available for debt service. Accordingly, the inherent weakness of this passive type of debt instrument is factored into the rating assignment.

ASSESSED VALUE GROWTH CONTINUED IN FISCAL 2011; SUBSTANTIAL APPEALS OUTSTANDING

Combined, San Francisco's participating project areas are geographically very large, covering approximately 2,300 acres, which is a typical size for highly rated tax allocation bonds. In dollar terms, the combined "project area" is one of the largest in the state with total assessed value (AV) at over $17.1 billion. The economic strength of the city of San Francisco is a key credit positive; despite the effect of the recent recession the project areas generally continued to grow and economic development continues. The combined area AV grew 8.5% over the prior year. Both these figures are slightly lower than presented with the sale of the agency's 2010 Series A bonds, a result of ongoing adjustments by the assessor. Still, this sound growth rate is a strong positive by comparison with the anemic increases or continued downturns in AV for most cities and counties statewide. This strong growth however is likely a lagging indicator, with a possible correction to come in the near term.

The bulk of the revenues are provided by five of the ten project areas, with no single area accounting for more than 30% of the projected total 2011 figure. The project areas are generally older with minimal revenue volatility, which is a credit positive: seven of the ten project areas' incremental AV represents 90% or more of total AV. Two of the remaining three have ratios which, at 64% and 79%, are narrow but not atypical of project areas with rated debt. Only one, Bayview Hunters Point, has an extremely narrow increment to total AV ratio at 27%; though by far the largest area at 1,081 acres, this project area accounts for only 3% of projected fiscal 2011 revenues because it is comparatively new. All but two of the individual project areas are very highly concentrated, with the top ten taxpayers representing 50% or more of incremental AV, a negative credit factor. The cross-collateralization of the reserve fund, described below, is an important credit strength mitigating this risk.

The San Francisco County Assessor is less pro-active than some about reducing assessed value based upon market values, preferring to invite property owners to appeal. Thus, adjustment of AV to reflect the current market is likely somewhat more lagged than elsewhere. The AV at risk--the difference between the value currently on the rolls and the lower value claimed by the appellants--is currently substantial at 23% of total AV. It is exceedingly unlikely that all appellants' requests will be granted in full. While history is no longer a good guide to future valuation, in order to provide some context it bears mentioning that between 2006 and 2011 the assessor has not granted decreases greater than 5% in any of the project areas. Were the assessor to grant unusually large appeals, it is possible that individual project areas would be unable to cover their loan payments. Given the strong loan payment coverage in other project areas, the cross-collateralization of the reserve fund effectively protects bondholders from the impact of such an eventuality. Still, to the extent that AV declines result in materially narrower debt service coverage on the parity debt, there could be downward pressure on the rating.

SATISFACTORY DEBT SERVICE COVERAGE AND TYPICAL ABT; RESERVE FUND CROSS-COLLATERALIZATION IS A KEY RATING CONSIDERATION

Fiscal 2011 revenues are expected to provide 1.42x coverage of maximum annual debt service including the current issue, down from over 1.5x at the time of its last issue. Coverage of individual project areas' loan obligations vary, but are never less than 1.25x, and often stronger. The additional bonds test governing additional Agency loans is the typical 1.25x maximum annual debt service requirement. Bond holders should note that in the absence of additional tax base growth effectively escalating school district pass-throughs will result in declining pledged revenues. The "effective" nature of the escalation results from the maturation of parity debt that pre-existed the SB 2113 extensions. Such debt has priority payment status, so as long as it is outstanding it reduces the revenue base on which the pass-throughs are calculated. The Agency has managed its debt issuance in careful consideration of this constraint.

Each of the project areas' loan agreements has a standard, three-part "lesser-of" debt service reserve requirement. A key credit strength is the cross-collateralization resulting from the fact that any of the twelve project areas' reserve funds may be replenished (subject to certain limits) by the contributing project areas' excess revenues. Ten of the Agency's twelve project areas contribute to the cross-collateralization. The exceptions are Mission Bay North and Mission Bay South which do not contribute, but which do benefit from the cross-collateralized reserve to the extent that their borrowing is for housing purposes. The tax revenues available for replenishment of the reserve fund (i.e. debt service coverage from the contributing project areas) represent approximately 54% of MADS, declining to about 43% of MADS in fiscal 2014.

The current financing will have a cash funded reserve. The Agency's reserve fund portfolio is fairly weak, with cash and sureties in investment-grade providers representing just 69% of total reserves. In total, the parity series that benefit from the cross-collateralization have a reserve requirement of approximately $82.3 million of which $41.2 million will be held in cash and the rest in sureties: $3.7 million from Assured Guaranty Municipal Corporation ( Aa3, negative outlook), $12.3 million from National Public Finance Guarantee Corp. (Baa1, developing outlook), $22.7 million from Financial Guaranty Insurance Corporation (rating withdrawn) and $5.4 million from Ambac (Caa2, developing outlook). Given the weakness of some of the surety providers, this reserve portfolio is a credit negative. The replenishment mechanism structured into the transaction is a key, mitigating strength.

The reserve replenishment mechanism is theoretically constrained by the limited dollar amount of incremental revenue that an area may receive, the time limit for receiving this increment, and by the aggregate cross-benefit represented by the bond proceeds used for low-and-moderate income housing projects. Eleven of the twelve project areas have no limits on the amount of increment revenues they may receive. One of the smallest, the South of Market project area, remains limited; the Agency intends to pursue elimination of the limits for this project area, as it has for others. If it did not, the limit would be reached in the project area prior to maturity of the debt if growth in project area AV is sustained at 3% per annum or above. The deadline for collecting incremental revenues is not a materially limiting factor as it has been extended beyond the 2041 maturity of the current financing for all but the South of Market project area.

The Agency annually receives less than the full amount of tax increment revenue generated by its project areas. The amount it receives is sized to accommodate debt service, capital projects, administration, and other expenditures. The remaining increment flows to underlying taxing entities including the City and County of San Francisco. The excess is theoretically available to address unanticipated expenditures. In reality, however, this might be a difficult source to tap as the underlying taxing entities likely have incorporated receipt of these revenues into their budgets.

PROPOSAL TO ELIMINATE REDEVELOPMENT AGENCIES ADDS UNCERTAINTY BUT POSES MINIMAL CREDIT RISK

The Governor's budget and a related, trailer bill phase out redevelopment agencies beginning in fiscal 2012 while explicitly maintaining the security of outstanding debt. Redevelopment agencies will be eliminated and successor agencies, most likely the city or county that created the redevelopment agency, will be required to retire agency debts in accordance with existing payment schedules. Pledged incremental revenue would continue to flow first to the tax allocation bonds, with remaining revenue flowing to the state in fiscal 2012, and to taxing agencies thereafter.

The draft legislation introduces uncertainty but we think the risk is very low that any adopted changes would affect the security pledge on tax allocation bonds. The governor has explicitly stated and the proposed legislation specifically states as the intention of the Legislature that no existing contractual obligations will be impaired. However, to the extent that the proposal's implementation lowers cash resources available for debt service payments, the rating on the Agency's obligations could come under downward pressure.

The trailer bill would also increase from 90 days to three years the statute of limitations for contesting the validity of any bonds issued by redevelopment agencies. Assuming the bill is passed and found to be constitutional, this extension adds uncertainty but is not a material credit risk in and of itself if, as is true with the current issue, the bonds have been duly authorized as verified by a clean bond counsel opinion.

The trailer bill makes clear that as soon as it becomes law, agencies will be prohibited from incurring additional obligations and will no longer be authorized to sell bonds. The governor's budget suggested passage of a constitutional amendment that would provide for a 55-percent voter approval of bonding against local revenues for redevelopment projects such as those currently funded with tax allocation bonds. Both the trailer bill and the proposed voter approval requirement effectively reduce the possibility of additional leveraging of incremental net revenues, thus protecting coverage of existing debt service.

Outlook

Moody's outlook on this rating is stable, reflecting the anticipated sound debt service coverage, the expectation that assessed valuation will remain sizable despite potential pressure, and the critical credit strength represented by the cross-collateralization effected through the debt service reserve fund replenishment mechanism.

What could change the rating-UP

Improved taxpayer diversification within individual project areas

Increasing proportion of cash-funded reserve funds

Higher debt service coverage maintained over the long term

What could change the rating-DOWN

Heightened appeals suggesting potential decreases in debt service coverage

Decline in debt service coverage

Lowering amount or quality of reserve funds

Weakening cross-collateralization of reserve fund

KEY STATISTICS

Maximum annual debt service (MADS) coverage from combined fiscal 2011 revenues: 1.42x

Minimum estimated coverage in a single contributing project area: 1.25x

Aggregate contributing project area size: 2,286 acres

Total project areas' AV, FY11: $17.1 billion

Cash and investment grade sureties as % of MADS: 69%

The principal methodology used in this rating was Moody's Analytic Approach To Rating California Tax Allocation Bonds published in December 2003.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, public information, and confidential and proprietary Moody's Analytics information.

Moody's Investors Service considers the quality of information available on the credit satisfactory for the purposes of assigning a credit rating.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Analysts

Dari Barzel
Analyst
Public Finance Group
Moody's Investors Service

Eric Hoffmann
Backup Analyst
Public Finance Group
Moody's Investors Service

Contacts

Journalists: (212) 553-0376
Research Clients: (212) 553-1653


Moody's Investors Service
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USA

MOODY'S ASSIGNS A1 RATING WITH STABLE OUTLOOK TO SAN FRANCISCO REDEVELOPMENT FINANCING AUTHORITY'S 2011 TAX ALLOCATION REVENUE BONDS
No Related Data.
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