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Rating Action:

Moody's Downgrades Santa Clara County's (CA) Ratings

Global Credit Research - 06 Jul 2012

Approximately $1.6 Billion in Debt Affected

New York, July 06, 2012 -- Moody's Rating

Issue: Lease Revenue Bonds (Capital Projects) 2012 Series A; Rating: A1; Sale Amount: $84,890,000; Expected Sale Date: 7/25/12; Rating Description: Lease Rental: Abatement

Opinion

Moody's Investors Service has assigned an A1 rating to Santa Clara County's Refunding Lease Revenue Bonds (Capital Projects) 2012 Series A, issued by Santa Clara County Financing Authority. In conjunction with this rating assignment, we have downgraded to Aa2 from Aa1 the County's General Obligation bond rating; downgraded to Aa3 from Aa2 the rating on the County's Pension Obligation Bonds; and downgraded to A1 from Aa2 the ratings on the County's outstanding lease backed obligations. The outlook on these ratings is stable.

Rating Rationale

The downgrades reflect the County's significantly weakened financial position, following three consecutive years of General Fund deficits (2009-2011), and the limited prospects for rebuilding the county's balance sheet in the current economic environment. The county's operating deficits have reduced its year-end General Fund balance and liquidity to very low levels, even for the new ratings. The assigned ratings also reflect the county's very strong tax base, solid long-term economic fundamentals, and above average socioeconomic profile. The County's favorable debt position--which despite the county's aggressive borrowing in recent years, remains manageable--and its generally favorable pension and retiree health positions also figure positively in the ratings. The county's recent, now amicably resolved dispute with the City of San Jose regarding property tax distributions to the city's former redevelopment agency was not a factor in the rating action.

The two notch, rather than one notch, downgrade of the lease backed obligations is the result of the county's weakening financial position. The County's previously strong financial position, coupled with the then low lease burden, had lead to an atypical, one notch distinction between the GO rating and the rating on lease backed obligations. With the weakening of the county's financial position this atypical distinction no longer applies. The current two notch distinction represents Moody's standard notching for California abatement lease-backed obligations. Broadly speaking the two notches reflect the risk of abatement and the narrower, general fund security pledge for leases compared to the very strong, voter-approved unlimited property pledge securing general obligation bonds.

Bond proceeds will be used for a new health information system at Santa Clara Valley Medical Center and other technological needs. The leased asset will be County jail, the value of which is estimated to be in excess of the amount of the bonds.

Key Strengths

• Large county with Assessed Value (AV) well in excess of the median for the rating level.

• Wealth and income levels well in excess of the median for the rating level.

• Largest employers and tax payers include among the best known technology firms in the world.

• Easily manageable debt position.

• Recovery of the labor market

• Large OPEB reserve and retiree health trust fund.

Key Challenges

• Weakened reserve position with reserves well below the median for the rating level.

• Still high unemployment rate.

• Continued, substantial general fund operating subsidy required for the county's medical center

Outlook

The outlook on Santa Clara County's long-term ratings is stable. The stable outlook reflects the likelihood that the County will stabilize its GF balance, which when combined with the strong economic indicators, will comfortably maintain the County's current credit quality.

What Could Cause the Rating to Go Up

• Significant improvement in the County's financial position

• Increases in fund balances coupled with plans to restore reserves to pre-downturn levels

What Could Cause the Rating to Go Down

• Continued deterioration of the financial position

• Significant amount of additional debt

RATING METHODOLOGY

The principal methodology used in this rating was General Obligation Bonds Issued by U.S. Local Governments published in October 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

The Global Scale Credit Ratings on this press release that are issued by one of Moody's affiliates outside the EU are endorsed by Moody's Investors Service Ltd., One Canada Square, Canary Wharf, London E 14 5FA, UK, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on www.moodys.com.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Information sources used to prepare the rating are the following: parties involved in the ratings, public information, confidential and proprietary Moody's Investors Service's information, and confidential and proprietary Moody's Analytics' information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

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 the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

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.

Kevork Khrimian
Vice President - Senior Analyst
Public Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Eric Hoffmann
Senior Vice President
Public Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Downgrades Santa Clara County's (CA) Ratings
No Related Data.

 

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