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Rating Update:

MOODY'S PLACES ON REVIEW FOR POSSIBLE DOWNGRADE ALL CALIFORNIA TAX ALLOCATION BONDS DUE TO RECENT LEGISLATION AND PENDING STATE SUPREME COURT ACTION

31 Aug 2011

Approximately $11.6 Billion in Debt Affected

Atwater Redevelopment Agency, CA
Municipality
CA

Opinion

NEW YORK, Aug 31, 2011 -- Moody's Investors Service has placed on review for possible downgrade all of its rated California tax allocation bonds. Recent state legislation and a resulting state supreme court case create substantial uncertainty over the future of redevelopment agencies in California and the tax allocation bonds that they issue. One of the two new laws eliminates tracking of revenues that secure these bonds and changes the flow of funds used to pay debt service. If left unchanged, this law would be significantly negative for bondholder credit. The other law would increase the financial burden on redevelopment agencies, a generally more modest, negative credit impact. Depending on whether the supreme court invalidates or affirms either or both laws, or parts of each, the court's decision could have widely differing impacts on individual redevelopment agencies. The uncertainty surrounding the potential outcome of the court case is a key contributor to the current action.

More specifically, the bill that would dissolve all redevelopment agencies, Assembly Bill 1X 26, does not require segregation and tracking of revenues pledged to individual tax allocation bonds. It also changes the flow of funds that are allocated to bond debt service. These developments would severely diminish the bonds' credit quality. If implemented as currently written, this legislation could result in multi-notch downgrades on bonds of the dissolved redevelopment agencies. This law was stayed by the state supreme court pending review.

Assembly Bill 1X 27, the second bill, would allow redevelopment agencies to remain in existence if their sponsoring city/county commits to making specific annual payments. This development would have more modest, but still negative credit implications for bondholders. The payments would most likely be made from the redevelopment agencies' funds, weakening their balance sheets and operating flexibility. This law too was stayed by the court.

The fact that a state supreme court ruling could invalidate one, both, or neither of these bills, in whole or in part, creates uncertainty that is negative for the credit quality of all California tax allocation bonds.

The California legislature is considering a clean-up law in its current session, which ends September 9. It is unclear, however, whether this legislation would address the risks to bondholders outlined above. The supreme court is targeting January 15, 2012 for a ruling on this case. Given these dates, it is possible that the review for downgrade will extend beyond Moody's typical 90-day time horizon.

For an in-depth discussion of these risk factors please see our forthcoming Special Comment "California Tax Allocation Bonds May Face Substantially Increased Credit Risk Due to Recent Legislation and Pending State Supreme Court Action."

Moody's adopts all necessary measures so that the information it uses in assigning a 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 Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's 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 www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Analysts

Dari Barzel
Analyst
Public Finance Group
Moody's Investors Service

Eric Hoffmann
Backup Analyst
Public Finance Group
Moody's Investors Service

Contacts

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MOODY'S PLACES ON REVIEW FOR POSSIBLE DOWNGRADE ALL CALIFORNIA TAX ALLOCATION BONDS DUE TO RECENT LEGISLATION AND PENDING STATE SUPREME COURT ACTION
No Related Data.
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