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Rating Action:

Moody's upgrades California Statewide Communities Development Authority Taxable POBs 2007 A-2 (CABs) to Caa2 from Caa3; outlook positive

21 Aug 2019

New York, August 21, 2019 -- Moody's Investors Service has upgraded the underlying rating on the California Statewide Communities Development Authority's Taxable Pension Obligation Bonds 2007 Series A-2 (Capital Appreciation Bonds) to Caa2 from Caa3, and has revised the bonds outlook to positive from stable. The bonds are also currently insured by AMBAC. This rating action applies to $19.3 million remaining fully accreted value.

RATINGS RATIONALE

The upgrade to Caa2 reflects the improved credit quality of the largest pool participant, the town of Paradise, which made a required deposit with the bond trustee on August 1 for its next debt service payment. The town's ability to make this payment was based on the receipt of insurance settlement funds and state backfill payments from the State of California for lost fiscal 2019 general fund revenues as a result of the almost complete destruction of the town's tax base by the November 2018 Camp Fire. In addition to normal insurance settlements, California passed legislation assuring Paradise backfill payments for lost property taxes for three consecutive years.

The Caa2 rating on the pooled bonds reflects the weighted average of our internal assessment of the credit quality for each of the pool participants. The pool participants' respective, current shares of remaining debt service outstanding are as follows: Paradise (40.2%), the city of Palm Springs (26.2%), and the city of Port Hueneme (33.5%). Paradise has a declining share of the pool over time, but remains a material share through final maturity in fiscal 2031, with Port Hueneme being the only pool participant in fiscal 2032 through fiscal 2035.

The heavy physical and economic damage to the town of Paradise has devastated its financial position, realistically eliminating any short-term ability to pay debt service, except with one-time funding sources such as those used for the recent deposit with the trustee, which will be used to pay bondholders on June 1, 2020. The town's ability to make the subsequent payments remains limited and will depend on the town's willingness to prioritize its use of unrestricted funds for debt service over its operational needs. The next possible default would be for a payment due to bondholders on June 1, 2021. Even if the city defaults in 2021, bondholders are likely to be made whole, as the debt is insured by AMBAC.

In consideration of the small size of the pool and absence of cross-collateralization among the participants, the rating is based our weak-link-plus approach to pooled obligations. This approach allows for a lift of up to two notches above the lowest rated participant's individual obligation. The uplift cannot exceed the weighted average credit quality of the pool participants, with the weights being each participant's current proportionate share of the debt service. If one of the participants has a speculative-grade rating, the rating cannot exceed Ba1.

RATING OUTLOOK

The positive outlook reflects our view that the agreed upon settlement funds amount between Paradise and Pacific Gas & Electric of $270 million significantly improves the city's ability to make its scheduled debt service payments or to cure any near-term payment defaults on its share of debt service depending on timing of the receipt of settlement funds. In either case the settlement should provide for an increased expected recovery level for bond holders.

FACTORS THAT COULD LEAD TO AN UPGRADE

- The town's ability and willingness to prioritize debt service over other service and infrastructure needs

- Rapid economic recovery and rebuilding of Paradise

- Improvement in the weighted average credit quality of pool participants

FACTORS THAT COULD LEAD TO A DOWNGRADE

- A protracted default by the Town of Paradise

- Inability or lack of willingness to repay its POB debt

- Decline in the credit quality of the two currently stronger pool participants

LEGAL SECURITY

Payments by the participating municipalities to the authority for their share of debt service are their unconditional obligations, payable from any legally available funds. There is no cross collateralization or cross default. Therefore, no municipality is responsible for the bond repayments of any other municipality, and default of one municipality will not constitute default of any other municipality. Additionally, the authority's general funds are not pledged for payment of the bonds. There is no debt service reserve fund.

Under the terms of separate trust indentures, the participating municipalities make debt service payments to the trustee, Wells Fargo Bank, NA (Aa1). The terms in the agreements are similar except for the debt service schedules. Payments sufficient to pay the municipality's proportionate share of principal and interest on the bonds are due on August 1 each year, ten months in advance of the payment date for principal and accreted interest. Once the funds are received by the trustee they are deposited into a bond fund, where there are held until they are transferred for payment to bondholders. If any funds remain after full debt service has been paid, those funds will be returned to the appropriate municipality by the trustee. Failure to pay principal and/or interest by August 1 constitutes a default under the trust agreement. If a default occurs, the municipality is given a 60 day period by the trustee to cure the default.

PROFILE

The California Statewide Communities Development Authority's Pension Obligation Bond Program provides an opportunity for local governments in California to finance their unfunded pension liabilities. Each of the local governments issued pension obligation bonds, which were sold to the authority to finance all or a portion of their unfunded pension liability.

METHODOLOGY

The principal methodology used in this rating rating was Public Sector Pool Financings published in July 2012. 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

Leonard Jones
Additional Contact
Regional PFG Northeast
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
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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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