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29 Jul 2019
New York, July 29, 2019 -- Moody's Investors Service has assigned a Aa2 rating to Los Angeles County Public Works Financing Authority's Lease Revenue Bonds, 2019 Series E-1 and Lease Revenue Bonds, 2019 Series E-2. The total par amount is expected to be $259.8 million. The county's Issuer rating (implied general obligation unlimited tax debt rating) is Aa1 and we maintain Aa2 ratings on the county's outstanding lease revenue bonds and Aa3 ratings on its outstanding certificates of participation, affecting a combined total of approximately $1.7 billion. The outlook is stable.
RATINGS RATIONALE
The Aa1 Issuer rating reflects the county's exceptionally large assessed value that stands at an all-time high at $1.6 trillion in fiscal 2020 as well as a large and diverse economy. The rating also incorporates the county's sound financial operations that are well managed and supported by healthy reserve levels that we expect to remain stable. The county's debt burden remains modest. Los Angeles County has a moderate pension burden and an elevated OPEB burden, however county management has taken progressive actions to increase funding for these long-term liabilities.
The one notch difference between the county's Issuer rating and lease revenue bond ratings reflects the standard legal structure for these California abatement lease financings and "more essential" leased assets. These leased assets include the county's hospitals, libraries and social service buildings, to name a few. The notching also reflects certain strong legal features of California general obligation bonds that are not shared by lease-backed obligations.
The Lease Revenue Bonds, 2019 Series E-1 & E-2 are under the Master Lease established in 2015, which unlike some of the county's earlier lease obligations does not provide the creditor with the right to re-enter or re-let the leased property in the event of a county payment default. This limitation results in a relatively weaker security. But given the county's overall credit quality, this relative weakness is not sufficient at this time to warrant a rating distinction.
The legal provisions for the Lease Revenue Bonds, 2019 Series E-1 & E-2 include that the county will provide rental interruption insurance for 24 months, title insurance, and will not require a debt service reserve fund, which is a negative credit factor. This negative credit factor is mitigated by the county having seismic insurance. In addition, the county has identified several unencumbered assets that are available for substitution under the lease structure with total property value exceeding the par amount of the 2019 Series E-1 & E-2 bonds.
The county's outstanding Refunding Certificates of Participation (Disney Concert Hall Parking garage), Series 2012 and Certificates of Participation, Series 1993 are rated Aa3. The two notch difference between the county's Aa1 Issuer rating and lease-backed obligation rating reflects the standard legal structure for California abatement lease financings and "less essential" leased asset which includes the parking garage of the Walt Disney Concert Hall. The two notches also incorporate certain strong legal features of California general obligation bonds that are not share by lease-backed obligations
RATING OUTLOOK
The stable outlook reflects the county's large and diverse tax base, which is expected to experience ongoing moderate growth. The outlook is also inclusive of the county's sound financial position with reserves expected to be maintained within current levels.
FACTORS THAT COULD LEAD TO AN UPGRADE
- Strong financial performance that contributes to sustained growth in reserves and cash
- Significantly improved wealth indicators of county residents
- Sizeable decrease in pension and OPEB liabilities
FACTORS THAT COULD LEAD TO A DOWNGRADE
- Significant deterioration in the county's financial position
- Inability to effectively manage retirement costs
- Weakened hospital operations that materially increase reliance on the county's general fund
LEGAL SECURITY
Security for the lease payments is a contractual pledge of the county of all of its available financial resources, subject to abatement in the event of damage or destruction of the leased property.
USE OF PROCEEDS
The bonds will refinance the county's outstanding commercial paper notes, which funded the construction of several projects including the Rancho Los Amigos Rehabilitation Hospital, MLK medical campus parking structure, fire station 143, East Antelope Valley Animal Shelter, probation department building renovation and the music center plaza renovation.
PROFILE
Los Angeles County is the largest county in the nation both by size ($1.6 trillion tax base) and population (10.3 million). The county has a large and diverse economy, and the unemployment rate is 4.9%, which is slightly above the state (4.8%) and US (4.4%).
METHODOLOGY
The principal methodology used in these ratings was Lease, Appropriation, Moral Obligation and Comparable Debt of US State and Local Governments published in July 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
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