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Rating Action:

Moody's assigns Aa3 to California SPWB's lease revenue bonds; outlook stable

05 Apr 2021

New York, April 05, 2021 -- Moody's Investors Service has assigned a Aa3 rating to the California State Public Works Board's approximately $429 million Lease Revenue Bonds 2021 Series B (Various Capital Projects). The SPWB plans to price the bonds on April 14. Moody's maintains a Aa3 rating on outstanding lease revenue bonds of the SPWB. The outlook is stable.

RATINGS RATIONALE

The Aa3 rating is notched once off the state's general obligation rating to incorporate the more essential nature of the state facilities financed with the debt, a moderate legal framework consisting of a continuing appropriation of lease payments but risk of abatement if financed property is unavailable to the state, and the large inventory of property owned by the state from which a facility could be substituted into the lease in the event base rentals on any of the currently financed facilities are abated.

The rating reflects that the indenture and facility leases require maintenance of rental interruption insurance to cover up to 24 months of abated base rental payments caused by events covered by facility insurance. The rating recognizes that the SPWB and the departments party to these particular facility leases do not plan to insure against seismic events, meaning rental interruption insurance would not cover abated base rentals caused by an earthquake. Further, the indenture will not require maintenance of a debt service reserve fund to secure the bonds.

The rating balances these negative credit factors with the ability of the state and the SPWB to substitute property under the jurisdiction of the departments for the currently financed facility in the facility lease. The California Government Code grants the state the ability to transfer the jurisdiction of property owned by the state from one state agency to another. In our view, this ultimately grants the state wide flexibility to substitute property in the facility lease.

Lastly, the rating also incorporates our expectation that the SPWB would act, as authorized in the indenture, to advance funds for the payment of debt service from other legally available sources if pledged base rentals were abated.

RATING OUTLOOK

The outlook for the State of California is stable and reflects the expectation that the state's massive economy and wealth will generate the resources necessary to sustain structural balance in a period of economic stability or to withstand a moderate shock to revenue in a period of economic weakness.

FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS

- The rating on the SPWB's lease debt could be upgraded if the State of California's general obligation rating is upgraded

FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS

- The rating on the SPWB's lease debt could be downgraded if the State of California's general obligation rating is downgraded

- The SPWB debt could also be downgraded if the legal framework supporting the payment of lease debt weakens

LEGAL SECURITY

The lease revenue bonds are secured by a pledge of base rental payments to be made by the participating state departments to the SPWB. The obligation to make lease payments under the leases constitutes a current expense of the departments, payable from lawfully available funds. Base rental payments, which are equal to debt service on the bonds, are supported by a continuing appropriation of the fund from which the departments derive their support appropriation established in California Government Code. The payments are, however, subject to abatement in the event of interference with the use or occupancy of the leased facility.

The leases between the departments and the SPWB require the departments to maintain casualty insurance in an amount equal to current replacement costs. In addition, the departments are required to maintain rental interruption insurance in an amount not less than the succeeding two consecutive years of base rental payments.

USE OF PROCEEDS

Proceeds of the Series B bonds will finance or refinance the costs of various projects of the departments that have entered into lease agreements with the SPWB.

PROFILE

The State of California is by far the largest state in the US. Its estimated $3.2 trillion gross domestic product accounts for 14% of the nation's economic output. It is home to almost 40 million residents, or 12% of the nation's population.

The state created the State Public Works Board in 1946 and empowered it to acquire, construct, improve, and operate public buildings and related facilities for state agencies. Since 1985, the SPWB has been active in the construction of facilities for purposes including higher education and corrections.

METHODOLOGY

The principal methodology used in this 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. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

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

This rating is solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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 https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.

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.

Matthew Butler
Lead Analyst
State Ratings
Moody's Investors Service, Inc.
7 World Trade Center
250 Greenwich Street
New York 10007
US
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Emily Raimes
Additional Contact
State Ratings
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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