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Rating Action:

Moody's assigns A2 to City of Anaheim (CA) Lease Revenue Bonds Series 2021A; outlook revised to stable

20 May 2021

New York, May 20, 2021 -- Moody's Investors Service has assigned an A2 rating to the City of Anaheim's (CA) Lease Revenue Bonds (Working Capital Financing), Series 2021A (Federally Taxable) with an expected par amount of $150.0 million. Concurrently, Moody's affirmed the city's A1 issuer rating and A2 rating on its outstanding senior lease revenue bonds. The outlook has been revised to stable from negative. Post-sale, the city will have $647.6 million in lease revenue bonds.

RATINGS RATIONALE

The A1 issuer rating incorporates the city's narrowed financial position driven by the economic downturn due to the pandemic and that the recovery to fiscal stability remains a challenge. While the city will receive about $108 million in one-time federal funds under the American Rescue Plan, the city will issue deficit bonds to offset the projected deficits through the end of fiscal 2023, and management still needs to identify budget solutions for the continued deficits estimated through fiscal 2025. The rating also incorporates the city's high exposure to economically sensitive revenue (about 50% of general fund revenue is comprised of transient occupancy taxes and sales taxes) which makes the city more vulnerable to economic downturns. The city's underlying large local and regional economy and our expectation that its tourism industry anchored by Disneyland will start to gradually recover and Disneyland will remain a vital economic engine for the city are also factored in the rating. The rating further reflects the city's large assessed value poised for favorable growth, solid resident income levels as well as its above-average long-term liabilities and high fixed costs.

The A2 rating on the city's Lease Revenue Bonds Series 2021A is one notch lower than the A1 issuer rating, reflecting a standard California abatement lease legal structure and leased assets that we view as "more essential."

The A2 rating on the city's outstanding senior lease revenue bonds incorporates the city's tourism industry anchored by Disneyland, and our expectation that growth in pledged revenue will slowly recover now that Disneyland has reopened, and debt service coverage should gradually improve. The rating also incorporates the solid legal provisions that under the Bond Indenture prohibit the city from issuing additional bonds other than refunding bonds, the special reserve fund that is required to be funded at maximum annual debt service as well as a debt service reserve fund that is funded with a surety at the standard 3-prong test.

RATING OUTLOOK

The stable outlook considers the sizeable amount of one-time federal stimulus funds and deficit financing bonds that will help the city fund operations as the economy recovers and revenue growth starts to improve. The outlook also factors our expectation that management will continue to implement budget solutions as needed to stabilize its financial position and start to rebuild reserves.

FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS

-Significant improvement in reserves and liquidity

-Material decrease in leverage and fixed costs

FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS

-Insufficient progress in addressing imbalanced operations leading to further deterioration in reserves and liquidity

-Sizable increase in leverage and fixed costs

LEGAL SECURITY

The issuer rating is equivalent to what would be the city's general obligation bond rating. In California, GO bonds are secured by the levy of ad valorem taxes, unlimited as to rate or amount, upon all taxable property within the city.

Security for the Lease Revenue Bonds Series 2021A are secured by a contractual pledge of the city of all of its available financial resources, subject to abatement in the event of damage or destruction of the leased properties.

The city's outstanding senior lease revenue bonds are payable by lease payments made by the City of Anaheim from its General Fund, though unlike a traditional California lease, the amount necessary to make the lease payments are equal to Lease Payment Measurement Revenues. Under the terms of the lease agreement, LPMRs are limited to the amount equal to revenues the city receives from 3% of the city's 15% hotel tax, all incremental hotel taxes generated within certain Disney (The Walt Disney Company: Senior Unsecured A2/stable) property constructed before 2009, and certain sales and property taxes collected from the Disney-owned property.

The lease payments are subject to abatement risk if the leased properties are unable to be used. The leased properties include a mix of essential and less essential assets: the Anaheim Convention Center and replacement parking facilities, public parking facilities under the Disneyland Resort as well other properties such as the city's mechanical maintenance facility, a central maintenance facility, fire station and the Anaheim Main library. The insurance provisions are typical for a California abatement lease and includes 24 months rental interruption insurance and title insurance and exclude coverage for seismic events. The bonds also benefit from a debt service reserve fund requirement based on the traditional 3-pronged test, which is expected to be funded with a surety.

USE OF PROCEEDS

Bond proceeds will be used to offset a portion of the city's projected deficits through fiscal 2023.

PROFILE

The City of Anaheim is in northern Orange County, 28 miles southeast of downtown Los Angeles and 90 miles north of San Diego. The city's population is 349,964 and the largest industry sectors that drive the local economy are professional/scientific/technical services, health services, and retail trade.

METHODOLOGY

The principal methodology used in the issuer rating was US Local Government General Obligation Debt published in January 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1260094. The principal methodology used in the lease rating was Lease, Appropriation, Moral Obligation and Comparable Debt of US State and Local Governments published in January 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1260202. The principal methodology used in the outstanding lease revenue ratings was US Public Finance Special Tax Methodology published in January 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1260087. An additional methodology used in the outstanding lease revenue ratings was Lease, Appropriation, Moral Obligation and Comparable Debt of US State and Local Governments published in January 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1260202. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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 certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

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Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1263068.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, 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 issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

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