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Rating Update:

MOODY'S DOWNGRADES TO Baa1 FROM A2 CATHEDRAL CITY RDA NON-HOUSING TABS

06 Apr 2011

AFFECTS APPROXIMATELY $81 MILLION OF DEBT

Cathedral City Redevelopment Agency, CA
Municipality
CA

Opinion

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 senior pass-throughs.

KEY STRENGTHS

-Large underlying assessed valuation.

-Large residential component adds diversity to the assessed valuation.

- High incremental AV to AV ratio

- Above-average liquidity

KEY CHALLENGES

- 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.

RATINGS RATIONALE

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 ratio.

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

KEY STATISTICS

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%

Non-Housing Bonds:

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.

REGULATORY DISCLOSURES

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.

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

Sujay Umashankar
Analyst
Public Finance Group
Moody's Investors Service

Kevork Khrimian
Backup Analyst
Public Finance Group
Moody's Investors Service

Contacts

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


Moody's Investors Service
250 Greenwich Street
New York, NY 10007
USA

MOODY'S DOWNGRADES TO Baa1 FROM A2 CATHEDRAL CITY RDA NON-HOUSING TABS
No Related Data.
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