Approximately $180 Million in Debt Affected Including Current Issue
2011 Tax Allocation Housing Bonds, Series A
Expected Sale Date
2011 Taxable Tax Allocation Housing Bonds, Series A-T
Expected Sale Date
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.
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
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
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
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
GOVERNOR'S PROPOSAL TO ELIMINATE REDEVELOPMENT AGENCIES POSES MINIMAL CREDIT
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
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.
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.
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Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.
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Public Finance Group
Moody's Investors Service
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MOODY'S DOWNGRADES TO A3 FROM A2 RATING ON RIVERSIDE COUNTY REDEVELOPMENT AGENCY TAX ALLOCATION HOUSING BONDS
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