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Related Issuers
Azusa Redevel. Agcy. Merged Proj. Area, CA
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Rating Action:

Moody's continues review for possible withdrawal on all California Tax Allocation Bond ratings due to insufficiency of key information

28 Feb 2013

$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
No Related Data.
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