Approximately $11.6 billion of debt affected
New York, June 14, 2012 -- Moody's Investors Service has downgraded to Ba1 all California tax allocation
bonds that were rated Baa3 or higher. All of our California tax
allocation bond ratings remain on review for possible withdrawal.
This continued review reflects the likelihood that insufficient information
will be available to evaluate the relative probability of default due
to the new cash flow pattern established in the redevelopment dissolution
law (AB 1x 26). The new cash distribution procedure effectively
eliminates bond indentures' flow of funds, and it is clearly
subject to differing procedural interpretations. These differing
interpretations can, without warning, give rise to the potential
for debt service defaults that did not exist prior to the passage of this
law. Absent administrative or legislative correction of this weakness
in the law's terms, Moody's will likely withdraw its
ratings on California tax allocation bonds.
RATING RATIONALE
The downgrades for the bonds rated Baa3 and higher primarily reflect the
heightened cash flow risks arising from the implementation of state legislation
dissolving all redevelopment agencies. This legislation effectively
altered the flow of funds to be used to pay bondholders.
Even with strong credit fundamentals and intact legal security,
timely debt service payments on California tax allocation bonds cannot
currently be assured. This uncertainty primarily arises from the
potential for legal and political disputes on the correct procedure for
distributing cash according to the redevelopment agency dissolution law,
AB 1x 26. This risk was recently highlighted by a dispute (discussed
below) between the City of San Jose's Successor Agency and Santa
Clara County that, according to a public notice filed by the City
of San Jose, threatens timely payment of debt service in August
despite sufficient tax increment revenues derived from the legal pledge
to bondholders.
The downgrade also reflects the absence of a robust mechanism within the
dissolution law itself to resolve such disputes and the evolution of the
California Department of Finance's guidelines on distributing tax
increment revenues. While the law has a reallocation procedure
in the event of a shortfall that results solely from the new cash distribution
procedure, the process for resolving disputed calculations and varying
legal interpretations is not sufficiently detailed or prescribed so as
to provide assurances of full or timely bond payments. The resolution
of such issues may be left up to the courts if the state does not pass
additional "cleanup" legislation. The current state
guidance to county auditor-controllers to withhold property tax
distributions in the absence of a state approved payment schedule also
injects an element of payment timing uncertainty that did not exist prior
to the dissolution law's adoption.
While the implementation of the law has given rise to new cash flow risks,
Moody's believes the law is clear that fundamental legal security
for tax allocation bonds is intended to be preserved. Therefore,
we would expect that any defaults stemming solely from the new law's
cash distribution procedure would likely over time be corrected.
We believe that after a default, recovery would likely be at or
close to 100%.
All ratings remain on review for possible withdrawal due to the potential
that insufficient information will be available on a continuing,
long-term basis with which to determine the relative probability
of cash flow disputes leading to defaults.
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
- Implementation of the legislation in a manner that clearly preserves
timely debt service payment and enables compliance with bond documents
- Legislative or judicial clarification that compliance with bond
documents takes precedence over other, apparently conflicting aspects
of the legislation
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
The Global Scale Credit Ratings on this press release that are issued
by one of Moody's affiliates outside the EU are endorsed by Moody's
Investors Service Ltd., One Canada Square, Canary Wharf,
London E 14 5FA, UK, 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 has issued a particular Credit Rating is available on www.moodys.com.
For ratings issued on a program, series or category/class of debt,
this announcement provides relevant regulatory disclosures in relation
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this announcement provides relevant regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
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this announcement provides relevant 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,
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Eric Hoffmann
Senior Vice President
Public Finance Group
Moody's Investors Service
Public Finance Regional Office
One Front Street, Suite 1900
San Francisco, CA 94111
U.S.A
JOURNALISTS: 212-553-0376
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Kevork Khrimian
Vice President - Senior Analyst
Public Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
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Moody's downgrades to Ba1 all California TABs rated Baa3 or above, reflecting sharply increased uncertainty of continued, timely cash-flow for debt service payments; all TAB ratings remain on review for possible withdrawal due to insufficient information
