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Rating Action:

Moody's assigns a Aa1 to the City and County of San Francisco, CA's 2019A COPs and 2019-R1 Refunding COPs

26 Sep 2019

New York, September 26, 2019 -- Moody's Investors Service has assigned a Aa1 to the City and County of San Francisco's $240 million Certificates of Participation (49 South Van Ness Project), Series 2019A and $111 million Refunding Certificates of Participation, Series 2019-R1 (Multiple Capital Improvement Projects). Post-issuance, the city will have $2.4 billion Aaa-rated general obligation (GO) bonds and $1.6 billion in lease-backed obligations outstanding. Moody's rates $1.4 billion of the lease-backed obligations Aa1 and $168 million Aa2. Our outlook on the city's long-term ratings is stable.

RATINGS RATIONALE

The Aa1 rating is one notch lower than the city's Aaa (GO) bond rating, reflecting a standard California abatement lease legal structure, including 24 months rental interruption insurance, and leased assets that we view as "more essential." As the city does not have property damage insurance for seismic events affecting the leased property, seismic risk is also not covered by the rental interruption insurance. The 2019-R1 refunding certificates of participation (COPs) also lack a debt service reserve, which is a weakness relative to the city's Aa1-rated lease backed obligations with a debt service reserve, but not sufficient to warrant a rating distinction. This risk is partially offset by the city's substantial inventory of assets that could be substituted in an abatement situation.

RATING OUTLOOK

The outlook on the city's long-term ratings is stable. The outlook primarily reflects the stability of the city's large and diverse tax base and the city's very strong financial position, which should remain stable given the financial policies implemented by city management.

FACTORS THAT COULD LEAD TO AN UPGRADE

- Not applicable

FACTORS THAT COULD LEAD TO A DOWNGRADE

- Deterioration of the city's financial position

- Unanticipated and material weakening of the city's economy for a prolonged period of time

- Material increase in debt, pension or OPEB liabilities

LEGAL SECURITY

The COPs Series 2019A will be secured by lease payments made by the city for use and occupancy of a 16 story, 450,000 square foot office building at 49 South Van Ness Street, an asset we consider more essential. The building will serve as the city's one-stop permit center, consolidating 1,800 city employees currently in 13 separate locations.

The Refunding COPs Series 2019-R1 are secured by lease payments made by the city for use and occupancy of the City's Laguna Honda Hospital Pavilion and North Residence buildings, which were renovated in 2010 including seismic improvements and are assets we consider more essential.

USE OF PROCEEDS

Proceeds of the Series 2019A COPs will be used to finance or refinance the acquisition, construction and installation of improvements to an office building to be used by the city, located at 49 South Van Ness Street, including the retirement of certain commercial paper certificates of participation issued to finance or refinance a portion of the project. It will also fund a debt service reserve and capitalized interest fund to be used for lease payments through December 2020, six month after estimated substantial completion. The relocation of city employees to this new facility, some currently in leased spaces, will reduce the city costs. Lease payments for the 2019A COPs increases by 5% annually in the first five years and then are level through final maturity in 2050.

Proceeds from the sale of the Series 2019-R1 refunding COPs, along with liquidation of the debt service reserve funds associated with the COPs being refunded, will be used to prepay outstanding Refunding COPs, Series 2009A and B, totaling $141.3 million. The city is taking level debt service savings over the life of the refunding COPs.

PROFILE

The City and County of San Francisco is the economic, employment and cultural center of the San Francisco Bay Area and northern California. The city encompasses over 93 square miles, of which 49 square miles are land, with the balance consisting of tidelands and a portion of the San Francisco Bay. Silicon Valley is about a 40-minute drive to the south, and the Napa/Sonoma wine country is about an hour drive to the north. The city's population is an estimated 884,000.

San Francisco's city-county organization is unique in California, governed by a board of supervisors, elected from eleven districts, and a mayor who serves as chief executive officer, elected citywide. The city has over 32,000 employees and in addition to general governmental activities typical of both cities and counties in California, it operates the San Francisco International Airport, San Francisco Municipal Transportation Agency, Port Commission, and Public Utilities Commission.

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.

REGULATORY DISCLOSURES

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.

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

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.

Lori Trevino
Lead Analyst
Regional PFG West
Moody's Investors Service, Inc.
One Front Street
Suite 1900
San Francisco 94111
US
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Eric Hoffmann
Additional Contact
Regional PFG West
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.
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