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MOODY'S DOWNGRADES TO A3 FROM A2 RATING ON RIVERSIDE COUNTY REDEVELOPMENT AGENCY TAX ALLOCATION HOUSING BONDS

01 Mar 2011

Approximately $180 Million in Debt Affected Including Current Issue

County
CA

Moody's Rating

ISSUE

RATING

2011 Tax Allocation Housing Bonds, Series A

A3

  Sale Amount

$14,533,000

  Expected Sale Date

03/01/11

  Rating Description

Tax Allocation

 

2011 Taxable Tax Allocation Housing Bonds, Series A-T

A3

  Sale Amount

$14,595,000

  Expected Sale Date

03/01/11

  Rating Description

Tax Allocation

 

Opinion

NEW YORK, Mar 1, 2011 -- Moody's Investors Service has downgraded to A3 from A2 the rating on the Redevelopment Agency for the County of Riverside Tax Allocation Housing Bonds. Concurrently, we have assigned an A3 rating to the agency's 2011 Tax Allocation Housing Bonds, Series A and 2011 Taxable Tax Allocation Housing Bonds, Series A-T.

RATING RATIONALE

The bonds are secured by the agency's housing set-aside revenues on parity with the outstanding 2004, 2005 and 2010 series Tax Allocation Housing Bonds. The housing bonds' rating is based on the project area's extraordinarily large size both geographically and in terms of AV. The downgrade is based upon a number of factors. The decline in assessed value (AV) at a higher rate than previously anticipated is a negative credit factor, and the ratio of incremental to total AV is consistent with the current, lower rating level. The agency's willingness to issue to the limit of its additional bonds test poses additional risk, and the resulting top taxpayer resistance is consistent with the current rating. The agency's healthy liquidity is an important factor in the rating assignment given that some outstanding parity bonds' debt service reserves are funded with below investment grade sureties.

REVENUES DERIVE FROM LARGE, DIVERSE PROJECT AREAS; ASSESSED VALUE DECLINES GREATER THAN ANTICIPATED

Tax increment revenues are generated in five project areas, each comprised of multiple sub-areas, located throughout Riverside County. The project areas total 71,718 acres producing incremental revenue, far larger than the median of approximately 1,400 acres for comparably rated tax allocation bonds (TABs). Similarly AV of $11.5 billion in fiscal 2011 is more than ten times the typical level for A3-rated TABs.

Riverside County is at the core of the inland empire where the residential real estate market has experienced among the largest dislocations in the state. After a modest decline in 2011, assessed value in 2011 declined more rapidly than anticipated due primarily to continued downward valuation of residential properties. AV fell 6.2% compared to the 3.7% decline projected ten months ago. About 60% of the decrease is attributable to downward revaluation of single family residential property, likely resulting from additional Proposition 8 adjustments as well as sales of foreclosed properties at below current assessed values. Another 30% of the decline was attributable to downward valuation of vacant parcels, suggesting little optimism that new development is imminent. While commercial and industrial properties showed some growth, they represent less than 5% of total parcels. Substantial appeals are currently outstanding, representing almost 10% of incremental AV.

INCREMENT RATIO CONSISTENT WITH CURRENT RATING; PROJECT AREA WELL DIVERSIFIED

Incremental AV of $8.6 billion in fiscal 2011 represents 74% of total AV, down from $9.3 billion or 76% of total 2010 AV. Both these figures are in line with the approximately 75% level typical of A3 rated TABs. Given the extraordinary size of the combined project areas, it is not surprising that the top ten taxpayers represent just 20% of incremental AV, with only the single largest representing more than 2%. The top ten are fairly equally divided among industrial warehouses and retail shopping centers, again with the exception of the largest taxpayer, the Inland Empire Energy Center LLC. The Energy Center, which represented 6.2% of total AV in fiscal 2011, is a power plant that started operation in 2008 and was completed last year. In 2011 the Energy Center property had an assessed value of $709.4 million, down from $748.7 million. The decrease was expected, although its magnitude was perhaps larger than anticipated. The AV decrease reflects the fact that it is a utility property that is state-assessed. Such properties' valuations often change once construction is completed as the final valuation compares existing operating power plants with the subject property.

AGENCY'S DEBT SERVICE COVERAGE EXPECTED TO NARROW, SIGNIFICANTLY INCREASING BONDHOLDER RISK

With the current issue the agency is indicating its willingness to issue additional debt to the limit of its additional bonds test. In doing so, it is materially increasing bondholder risk. The agency's housing bonds have had strong debt service coverage since 2004, approximating 1.45x maximum annual debt service. This strong coverage had been a key factor in the housing TABs rating to date. With the current proposed issue, the agency anticipates issuing to the limit of its additional bonds test or 1.25x. At that amount of leverage, the agency could lose AV equivalent to that of the top four taxpayers before it falls below sum-sufficient coverage, which is consistent with the current rating; at higher rating levels agencies could lose the equivalent of all top ten taxpayers. With the current issue the agency is proposing to modestly improve its additional bonds test (ABT) by protecting against concentration in the top taxpayer: to the extent that any single property owner represents more than 6.5% of AV, the agency will disregard that excess in their ABT revenue calculation.

AGENCY'S STRONG CASH POSITION MITIGATES RISK OF RESERVE REQUIREMENTS FUNDED WITH BELOW INVESTMENT GRADE SURETIES

The agency's Series 2010 housing TAB and the current issue have cash funded reserve funds. This renders them stronger credits than the Series 2004 and 2005 parity obligations whose reserve fund requirements are satisfied with sureties from below investment grade providers. The agency's strong liquidity mitigates the risk associated with these sureties so that no rating distinction is called for. At fiscal yearend 2010 the agency had $41.8 million in cash and investments, excluding cash with fiscal agents. This represents 50% of the total Series 2004 and 2005 debt outstanding, an amount clearly more than sufficient to address any debt service needs which cannot be met through the sureties. The bonds are not secured by the agency's cash on hand, but given Riverside County's substantial presence in the bond market, Moody's believes that the agency would use its resources if necessary to make debt service payments. As the agency proceeds with its projects it is likely that liquidity will decrease. Over time, should liquidity diminish substantially and reserves remain funded with below investment grade sureties, the ratings on the Series 2004 and 2005 bonds could come under material downward rating pressure.

STATE CONTROLLER'S REVIEW IDENTIFIES REPORTING PROBLEMS; NOT A MATERIAL CREDIT NEGATIVE

The state Controller recently launched an review of a number of redevelopment agencies, including Riverside. The Controller's stated intention is to bring facts to bear on the discussion surrounding the utility of redevelopment agencies. The review has been completed, but results not yet released. A document provided by the agency suggests that the controller's office, with the agency's cooperation, identified several reporting problems. Regardless, Moody's believes the results of such an review would have no effect on the security of the bonds, and it is therefore not a materially negative credit factor.

GOVERNOR'S PROPOSAL TO ELIMINATE REDEVELOPMENT AGENCIES POSES MINIMAL CREDIT RISK

The Governor's budget recommends phasing out redevelopment agencies beginning in fiscal 2012 while maintaining the security of outstanding debt. Redevelopment agencies will be eliminated, and successor agencies 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 and then to the state. The proposal introduces uncertainty but we think the risk is low that any changes would affect the security pledge on tax allocation bonds. Moody's does not believe the credit risk is material as the governor specifically asserted in his proposal that no existing 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 Series 2004 and 2005 could be negatively affected as discussed above.

Beginning in fiscal 2012 existing agencies would be required to cease creation of new obligations. A constitutional amendment 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. The voter approval requirement effectively reduces the possibility of additional leveraging of incremental net revenues, thus protecting coverage of existing debt service.

THE ASSIGNED RATING REFLECTS THE PASSIVE NATURE OF THE PLEDGED REVENUE STREAM

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.

What could change the rating-UP

Return to long-term trend of AV growth

Improved ratio of increment to total AV

Higher debt service coverage maintained over the long term

What could change the rating-DOWN

Material decline in ratio of incremental to total AV

Increased concentration among the top taxpayers

Decline in debt service coverage

KEY STATISTICS

Project area size: 76,386 acres (71,718 producing incremental revenue)

Assessed value, fiscal 2011: $11.5 billion

Change in AV, fiscal 2010-2011: -6.2%

Incremental AV as % of total, fiscal 2011: 74.3%

Ten largest taxpayers as % of incremental AV, FY 2011: 20.3%

Largest taxpayer as % of incremental AV, FY 2010: 8.3%

Maximum debt service coverage by projected FY 2011 revenues: 1.25x

The last rating action with respect to the Riverside County Redevelopment Agency Housing Bonds was on April 23, 2010 when the A2 rating was affirmed.

The principal methodology used in this rating was Moody's Analytic Approach To Rating California Tax Allocation Bonds published in December 15, 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

Michael Wertz
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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New York, NY 10007
USA

MOODY'S DOWNGRADES TO A3 FROM A2 RATING ON RIVERSIDE COUNTY REDEVELOPMENT AGENCY TAX ALLOCATION HOUSING BONDS
No Related Data.
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