AFFECTS APPROXIMATELY $81 MILLION OF DEBT
Cathedral City Redevelopment Agency, CA
NEW YORK, Apr 6, 2011 -- Moody's has downgraded to Baa1 from A2 the rating on Cathedral City
Redevelopment Agency (RDA) Series 2007A tax-exempt and 2007B taxable
senior-lien non-housing Tax Allocation Bonds (TABs). The bonds are
secured solely by allocated incremental revenues from the agency's Merged
Redevelopment Project Area, net of housing set-asides and other
-Large underlying assessed valuation.
-Large residential component adds diversity to the assessed valuation.
- High incremental AV to AV ratio
- Above-average liquidity
- Rapid deterioration of property market values and assessed values, and the
possibility of further declines in 2012
- Near 1.0 times coverage of debt service on the agency's senior and subordinate
non-housing liens on a combined basis.
The downgrades on the agency's Series 2007A and 2007B non-housing TABs primarily
reflects the fact that incremental revenues securing these bonds significantly
decreased in 2010 and 2011 with resulting debt service coverage of 1.23x on the
senior-lien non-housing TABs and 1.03x coverage on the senior and
subordinate-liens combined more consistent with Baa-rated California
TABs. Moody's expects further assessed value (AV) reductions to be smaller
in magnitude than experienced in 2010 and 2011 given recent stabilization in the
regional housing market. The vast majority of the AV declines resulted from
Proposition 8 rollbacks enacted by the County Assessor. These properties' AVs
will therefore not be subject to the same strict AV growth limits that would
result from successful assessment appeals or market turnover, unless/until the
former, adjusted base AV is reestablished. Absent any further large declines in
residential property values, Moody's expects debt service coverage will
remain near their current level and provide support to the current Baa1
rating level on the Series 2007A and 2007B Non-Housing TABs. Favorable credit
factors supporting the Baa1 rating include the large size of the project area,
minimal taxpayer concentration, high residential concentration by land use with
minimal vacant land, above-average liquidity, and a high increment to total AV
DEBT SERVICE COVERAGE DECREASES TO RELATIVELY BELOW-AVERAGE LEVELS
Debt service coverage levels have thinned to weaker levels, particularly on the
Agency's non-housing-related TAB debt, and remain challenged by on-going stress
in the region's residential real estate market. The Baa1-rated non-housing
TABs are senior-lien, fixed rate bonds. Moody's estimates that maximum annual
debt service coverage on the Agency's outstanding non-housing senior-lien TABs
by projected fiscal 2011 tax increment revenues will be relatively below-average
at 1.23x, a result of the recent AV reductions in 2010 and 2011.
Moody's estimates that maximum annual debt service coverage on the senior
and subordinate liens combined is very thin at 1.03x in 2011. Based on stress
tests Moody's performed, an Assessed Value (AV) reduction of 15% in 2012would
result in still sum sufficient coverage (1.02x) on the senior-lien non-housing
TABs, although coverage would decline to 0.85x on the senior and
subordinate non-housing liens combined. However, Moody's does not anticipate AV
will decline by this amount given the aggressive Proposition 8 reductions
initiated to date by the County Assessor's office. This expectation is supported
by the agency's own estimate of a 2% to 3% AV reduction in 2012 with input
provided by the County Assessor's office, as well as no additional Proposition 8
reductions in 2012. Assessed valuations on residential properties within the
project areas have been rolled back to January 2001 market prices and current
median sale prices of residential properties in Cathedral City appear to be
near this historical price level based on current housing market activity
data. Given this recent stabilization, Moody's does not anticipate
further property turnover or assessment appeals will result in another large
AV reduction which was experienced in 2011.
COLLAPSE OF RESIDENTIAL REAL ESTATE MARKET RESULTS IN SIGNIFICANT AV DECLINE
The City of Cathedral City is located in western Riverside county near the
resort communities of Palm Springs. The Merged Project Area covers approximately
19,672 acres and nearly the entire city. The project area is primarily
residential and diverse, with top ten taxpayers on a combined basis representing
just 6.1% of incremental AV. The city is in California's Inland Empire, one of
the areas most heavily impacted by the residential real estate market downturn.
From its high of $4.4 billion in fiscal 2009, AV in the project area fell by
11.9% in fiscal 2010 and another decline of 6.7% to $3.6 billion in fiscal 2011.
Moody's notes the County Assessor's office was particularly aggressive using
Proposition 8 and rolled back valuations on residential properties and vacant
land located in the city to January 2001 price levels. Some stabilization in the
housing market has been seen in recent months, likely limiting future declines
to a manageable level. However, given the year-to-date decline in residential
properties the possibility for significant, additional AV reductions in 2012
cannot be ruled out, although Moody's expects AV reductions to be less than
experienced in 2010 and 2011. The agency estimates that the project area will
likely see a reduction of 2% to 3% in 2012.
HEALTHY LIQUIDITY A KEY SHORT-TERM CREDIT STRENGTH
An important factor in the current rating is the agency's maintenance of an
above average unrestricted reserve position. Audited fiscal 2010 figures show
unrestricted cash and investments of $17.8 million (or approximately 54% of
gross revenues). This is an important source of liquidity in the event that tax
increment revenue does continue to decline due to additional AV decreases.
What could move the rating-UP
- Significant increase in senior-lien debt service coverage levels along with
stabilization in the project area's tax base
What could move the rating-DOWN
- Significant deterioration in socioeconomic measures
- Protracted decline in senior-lien debt service coverage levels
- Substantial weakening in the agency's financial and liquidity position
Total size: 19,672 acres
Average annual growth of incremental AV., FY 2006-2011: 5.1%
Incremental Value decline between 2010 and 2011: 7.6%
Largest taxpayer as % of incremental AV., FY 2011: 1.2%
Ten largest taxpayers as % of incremental AV, FY 2011: 6.1%
Additional Bonds Test: 1.25x
Additional Bonds Test (senior and subordinate lien): 1.10x
Peak total debt service coverage, FY 2011, est.: 1.23x
The principal methodology used in this rating was Moody's Analytic Approach To
Rating California Tax Allocation Bonds published in December 2003.
Information sources used to prepare the credit rating are the following: parties
involved in the ratings, public 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.
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Public Finance Group
Moody's Investors Service
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MOODY'S DOWNGRADES TO Baa1 FROM A2 CATHEDRAL CITY RDA NON-HOUSING TABS
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