$9.1 billion in debt affected
New York, February 28, 2013 --
Moody's Investors Service continues its review for possible withdrawal
of all ratings of tax allocation bonds (TAB) issued by the former California
redevelopment agencies (RDAs). We anticipate that this review will
conclude within no more than 90 days. By the end of this period,
we will withdraw those ratings for which we do not have adequate,
verified financial information. For those with sufficient information,
we will either confirm or revise the existing ratings based on the new
information.
RATING RATIONALE
In June 2012, we downgraded to Ba1 all California redevelopment
agency tax allocation bonds that were rated Baa3 or higher, and
also placed all RDA ratings under review for possible withdrawal.
The downgrade was prompted by the substantially increased risk of default
resulting from the state's dissolution of all redevelopment agencies.
The review of these ratings was prompted by the lack of clarity in how
the changes to the laws governing "successor" agencies (Assembly
bills 26 and 1484) would be implemented and how different interpretations
of these laws could lead to an even greater probability of default.
In order for us to maintain an RDA's TAB ratings, we will
need to review debt service coverage calculations that incorporate the
cash flow changes brought about by AB 26 and 1484. This information
must be provided or verified by a reliable third-party rather than
solely the successor agency itself. As in the past, we will
also require other, verified data elements, including the
current incremental assessed valuation, the base year assessed valuation,
the status and value of any debt service reserve funds, and the
current assessed valuation of the top ten taxpayers in each of the RDA's
project areas with rated debt.
AB 26 and 1484 greatly affect the legal framework in which we calculate
debt service coverage for TABs. Given the requirements of the statutes,
and the way in which payments on bonds are made as a result, our
ratings going forward will be dependant in large part on reviewing debt
service coverage during two semi-annual, calendar year periods--January
through June and July through December--rather than on an
annual, fiscal year basis. These debt service coverage calculations
must be made or verified by a reputable third-party, such
as an auditor, consultant or other qualified professional,
rather than the successor RDA itself. This is consistent with our
general practice of requiring audited or third-party verified financial
statements for municipal debt issuers in general.
In addition to these coverage calculations, other information we
will need to maintain our ratings includes, by project area:
• Semi-annual debt service calculation for the current and
next calendar year, provided by an auditor or other qualified third-party.
• Pass-through payments for the current and next calendar
year, provided by an auditor or other qualified third party
• The current balance of any cash funded debt service reserves,
provided by the trustee
• Surety provider contract that includes the terms of surety for
debt service reserve fund
• Incremental assessed value and top ten tax payers' secured
or total assessed value, as determined by the county assessor
In addition, our rating will continue to incorporate the same types
of information we relied on to make our initial assessments of the credit,
such as the composition of the tax base and socioeconomic indicators of
the community in which the project area is located (if not project area
specific data).
During the next 90-days, Moody's will review those
ratings for which successor agencies provide adequate information.
These reviews will incorporate the level of semi-annual cash flow
coverage of debt service in addition to debt service coverage as traditionally
measured and the other rating factors discussed above. At the end
of the 90-day period, or earlier if the successor agency
indicates that it does not intend to provide the required information,
Moody's will withdraw ratings.
STRENGTHS
• Successor agencies, which replaced the dissolved redevelopment
agencies, remain explicitly obligated to honor existing bond contracts,
with recognition of legally pledged revenue streams, debt service
reserve funding requirements, and other performance requirements
in existing bond documents.
• County auditor-controllers have generally indicated a very
strong willingness and ability to comply with the new revenue allocation
requirements on a sufficiently timely basis to allow successor agencies
to meet existing debt service payment obligations.
• In the long-run, existing contract law should protect
bondholder's interests, minimizing losses that might result solely
from new procedural requirements in the redevelopment dissolution law.
CHALLENGES
• While the legislature's intent to honor existing obligations is
clearly stated in the law, the mechanics of the new law do not provide
sufficient clarity on process to realize this intent.
• The law creates significant uncertainty with respect to timing
and mechanics of cash flows, which in our view effectively trumps
the strength of the legal security and debt service coverage of bonds.
• The law establishes an initial allocation of property tax revenues
that conflicts with existing bond documents, and the effectiveness
of the resolution process on a timely basis is uncertain.
• The timeframe for property tax disbursements is more restricted
than it had been previously, potentially resulting in mismatched
receipt and disbursement schedules over the course of a year.
• The new law's audit requirements and sheer complexity have resulted
in unexpected payment delays. These will require legal and/or administrative
clarification.
WHAT COULD MAKE THE RATINGS GO UP
• Demonstration of significant debt service coverage in all semi-annual
periods, taking into account all pass-through payments,
senior and subordinate. We would consider a credit positive the
fact that an agency has received confirmation from the department that
future debt service obligations are considered conclusive.
• Implementation of the legislation in a manner that clearly preserves
timely debt service payment and enables compliance with bond documents
WHAT COULD MAKE THE RATINGS GO DOWN
• Continued implementation of the legislation in a way that does
not clearly preserve timely debt service payment
• Continued legal uncertainty and conflict between the law's requirements
and strict compliance with existing bond documents
• Judicial determination that compliance with bond documents is subordinate
to, or to be balanced against, other objectives of the legislation
The principal methodology used in this rating was Moody's Analytic Approach
To Rating California Tax Allocation Bonds published in December 2003.
Please see the Credit Policy page on www.moodys.com for
a copy of this methodology.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain 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 certain 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 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.
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.
Gregory W. Lipitz
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 S 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 continues review for possible withdrawal on all California Tax Allocation Bond ratings due to insufficiency of key information
