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Rating Update:

MOODY'S ASSIGNS A2 RATING TO FREMONT REDEVELOPMENT AGENCY TAX ALLOCATION BONDS, 2011 SERIES A

09 Jun 2011

Approximately $135 Million In Debt Affected

Municipality
CA

Opinion

NEW YORK, Jun 9, 2011 -- Moody's Investors Service has assigned an A2 rating to the Redevelopment Agency of the City of Fremont (Fremont Merged Redevelopment Project) Tax Allocation Bonds, 2011 Series A

RATINGS RATIONALE

The current offering is secured by a first lien on tax increment revenues generated within the Agency's Merged project area, net of the county administration fee, housing set-aside funds, and senior pass-through obligations. The rating reflects the large size of the project area which benefits from its location in the large San Francisco Bay Area economy; the very strong ratio of incremental to total assessed value which limits volatility; the relatively low concentration of the project area in the top ten taxpayers; and the strong projected coverage of debt service and comparatively high additional bonds test. The Agency has no parity debt outstanding. There have been no changes in the above factors since our rating report dated February 17, 2011. These factors are reproduced below for the reader's convenience.

Following on the governor's January budget proposal, in March legislation was proposed to eliminate redevelopment agencies. This legislation was narrowly defeated. The legislation included provisions that all debt service and other enforceable obligations of tax increment that were in existence prior to the legislation's effective date would continue to be paid. The legislation called upon "successor agencies" to redevelopment agencies to, where possible, undo agreements that redevelopment agencies had entered into. We do not believe this extends to bonded indebtedness. Furthermore, bond counsel is expected to provide an opinion that the current issue is a valid and binding obligation of the agency and has a valid lien on pledged funds. Successor agencies could, perhaps, challenge the use of bond proceeds; bond counsel does not believe that such a challenge, even if successful, would impair bondholders' security. Accordingly, Moody's does not believe that the bondholders' security would be impaired should the proposed legislation be re-introduced and adopted into law.

PROJECT AREA IS LARGE, DIVERSE THOUGH NOT IMMUNE TO ECONOMIC CYCLES

The project area is large and diverse, both key credit strengths, but still somewhat vulnerable to economic cycles. The project area consists of four sub-areas totaling 3,913 parcels, but is defined primarily by Industrial project area which represents about 75% of both total parcels and assessed value. True to its name, Industrial is an industrial project area. The city of Fremont is located in the San Francisco Bay Area not far from Silicon Valley, and the project area benefits from this location. Industrial is characterized largely by manufacturing of high-end computer equipment and peripherals. The agency reports that the items produced in this area are generally specialized, and are not likely to be shipped overseas for mass production. The top ten taxpayers represent 28.9% of total assessed value (AV), which is diverse by comparison with the typical redevelopment project area. However many of the taxpayers are not ultimate users, but lease out their spaces, suggesting some economic vulnerability. In fact, the agency reports that vacancy rates recently reached as high as about 18%, though still below the peak of over 20% experienced during the dot.com recession in 2002-03. The economic recovery appears to be taking hold, as the agency reports vacancy rates currently at about 14% and slowly declining. The project area's vulnerability to economic cycles is a negative factor, but it is mitigated by the agency's strong debt service coverage and additional bonds test (ABT): even if the agency were to issue to the level of its ABT and AV were to be reduced by 15%, the project area could lose taxpayers equivalent to the top ten and still generate more than sum-sufficient coverage.

Despite a recent decline, the project area AV remains large and is unusually stable. A key credit strength is the fact that incremental AV is an unusually large portion of total AV, minimizing revenue volatility: the merged project area's incremental AV is 90% of total, and Industrial's incremental AV is 98% of total. After growing in fiscal 2008, 2009 and 2010, the merged project area experienced a 5.5% AV decline from $4.1 billion in fiscal 2010 to the current, still large, $3.8 billion. The decline was broadly based across all four sub-areas, with Industrial falling by 7.1%. The agency suggests that this decline was in part due to the county assessor's pro-active reduction of AV pursuant to Proposition 8. Such reductions have been common throughout the state with respect to residential properties, but have been less so with respect to non-residential parcels. Despite the assessor's reduction, there are still a substantial number of appeals outstanding. The agency attributes this to property owners' sophistication, which translates into a willingness to appeal their AV on a regular basis. The highest reduction granted appellants in recent years was 12.2% of appealed value in 2008, followed by 3.0% in 2009. Moody's believes continued moderate AV reduction is a possibility, but given the strong projected debt service coverage at the current AV level, it is unlikely that such a reduction would lower coverage sufficiently to materially damage the bonds' credit profile.

HEALTHY DEBT SERVICE COVERAGE EXPECTED OVER THE LONG TERM

The agency's strong projected debt service coverage is an important credit positive. Projected fiscal 2011 net revenues provided 2.27x coverage of projected maximum annual debt service (MADS). The agency currently has no parity debt outstanding, having paid off in its entirety the 2004 tax allocation bond issue. The 2004 bonds were prepaid from cash on hand, based upon the agency's analysis of interest earnings on that cash compared to the cost of borrowing.

The current issue is expected to fund the Agency's one, large project for the foreseeable future: its contribution to a new Bay Area Rapid Transit station. The Agency has no plans to issue additional debt, expecting that the additional capital projects will be cash funded. The ABT of 1.50x is above the more typical 1.25x level, helping ensure that debt service coverage will remain comparatively strong even in the event of additional leverage. The conservative bond structure which contemplates level debt service also is a credit positive, as it does not depend upon AV growth to generate continued sound coverage.

WHAT COULD MAKE THE RATING GO UP

Continued growth of merged project area

Increased diversity and economic stability among taxpayers

Higher debt service coverage maintained over the long term

WHAT COULD MAKE THE RATING GO DOWN

Extended, material decline in AV

Lower ratio of incremental to total AV

Increased concentration among the top taxpayers

Decline in debt service coverage

KEY STATISTICS

Project area acres: 3,913

Assessed value, fiscal 2011: $3.8 billion

Change in AV, fiscal 2010 to 2011: -5.5%

Incremental AV as % of Total AV: 90.2%

Top ten taxpayers as % of Incremental AV: 28.9%

MADS coverage, projected fiscal 2011: 2.27x

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 and public information.

Moody's Investors Service considers the quality of information available on the credit satisfactory for the purposes of maintaining 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 A2 RATING TO FREMONT REDEVELOPMENT AGENCY TAX ALLOCATION BONDS, 2011 SERIES A
No Related Data.
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