(Jan. 19, 2012) -- Uncertainty over implementation of the phase-out of California’s redevelopment agencies prompted Moody’s Investors Service to downgrade $11.6 billion of tax allocation bonds by one notch this week. The downgrade applies to TABs in California that are rated Baa2 and above. As an example, that means a TAB formerly rated A2 would now be rated A3 after the downgrade. “The downgrade primarily reflects near-term cash flow risks arising from legislation recently upheld by the state supreme court that dissolves all redevelopment agencies,” Moody’s said. “Effective February 1, 2012, every redevelopment agency statewide will be replaced by a ‘successor agency’ charged with winding down the redevelopment agency’s affairs. This wind-down includes the payment of existing debts according to their terms. However, the implementation and potential for varying interpretations of the new legislation incrementally raises the risk that some debt service payments will not be made on a timely basis.” Since existing contracts can’t be undone by new laws, tax allocation bond payments are supposed to be made under the implementation of redevelopment phase-out. State officials have stressed all along that debt service will be protected. “While we believe that existing legal protections for contracts, as well as the legislature’s clearly stated intent in the new law, almost certainly preserves tax allocation bonds’ fundamental security, our tax allocation bond ratings remain on review for possible further downgrade, Moody’s said. “This continued review reflects the near-term practical and potential legal challenges to implementing the new dissolution legislation while maintaining tax allocation bonds’ credit quality above a minimum level. We expect that the promulgation of implementation guidelines in the near future and the resolution of any conflicting interpretations of the law should permit a reevaluation of these ratings within our standard 90-day timeframe.” As we have noted before, certain tax increment debt with below investment-grade ratings still could face added risk if the new law prevents unencumbered redevelopment agency funds from being used to help cover shortfalls.
(Dec. 23, 2011) -- There is still something to be said for having bond insurance on certain municipal deals, especially if the “underlying” rating falls from A-minus to single-B in one big downgrade. That is what happened this week to certificates of participation sold in 2003 (Series QQ) by the CSDA Finance Corp. on behalf of the Foresthill Public Utility District. Foresthill is located about halfway between Yuba City and Lake Tahoe. These COPs carried bond insurance at the time of the sale from FSA. After the financial crisis, Assured Guaranty ended up providing the guarantee on the FSA-backed bonds. Investors no doubt are happy about that, especially those holding these COPs. The Foresthill P.U.D. initial sale was small to begin with, just a bit more than $3 million, and about $2.4 million remain outstanding. Why the big downgrade by Standard & Poor’s? In a nutshell, the utility district has suffered several years of operating losses. In 2010 rates were raised to help stop the bleeding. However, an initiative-driven special election in June 2011 repealed the rate increase. The utility district’s board is now exploring whether it can find another way to raise rates, or to hold another election to try to reverse June’s vote. “If the district is not able to raise revenues through either of the aforementioned methods, management has indicated that the district will likely close its doors on June 30, 2012,” Standard & Poor’s said. “Management has further indicated that if this happens, the state will likely step in, increase rates, and find another agency to take over the service. It is unclear how debt service would be paid in the event of a takeover by another agency.” The district has formed a citizen’s advisory committee that will meet in January 2012 to discuss possible options. “The district is currently in a financial crisis caused by operating at a loss for the majority of the past decade,” the Foresthill P.U.D. said in a recent press release about the advisory committee. “It faces possible closure and the dissolution of the utility.” The COP proceeds helped the district buy its water source at the Sugar Pine Dam and reservoir. However, the district depleted reserves instead of raising rates in recent years.
(Dec. 20, 2011) -- Moody’s Investors Service has downgraded National Public Finance Guarantee Corp. to Baa2 from Baa1. The outlook has been changed to “negative” from “developing.” National Public Finance was formed by MBIA Inc., the parent company, to shield the public finance exposure of the company from other riskier securities. MBIA Insurance Corp. holds the riskier securities and is rated at B3. Even though the municipal bond portfolio has been segregated, Moody’s said National Public Finance Guarantee faces risks from other entities within the MBIA umbrella. “Moody’s believes that growing losses at MBIA Insurance are negative for National, whose future business prospects are premised on its ability to avoid or minimize negative financial and business impacts from its affiliation with the broader MBIA group,” the rating agency said in a report. “National’s negative outlook reflects its credit linkage to the other weaker entities of the group as a result of ongoing restructuring litigation.” Several banks sued MBIA over the restructuring that put its municipal bond exposure in a segregated entity. The banks said the move increased the risk they wouldn’t be repaid from MBIA’s weaker subsidiaries. MBIA also has charged the banks with misrepresenting the security of instruments it insured, including those tied to mortgages. MBIA and several of the banks have since reached settlements. In the latest example, MBIA is paying $1.1 billion to Morgan Stanley to end a dispute. According to one report, National Public Finance is loaning MBIA Insurance the money to cover that payment. Moody’s said MBIA Insurance is reducing exposure to riskier securities through the settlements, but there is a downside. “While these settlements have reduced potential volatility, they have been a substantial drain on the capital and liquidity resources of the insurer [referring to MBIA Insurance],” Moody’s said.
(Dec. 14, 2011) -- When the City of Vallejo filed for bankruptcy, we took pains to note that the Vallejo Unified School District is an entirely different credit and was unaffected by the city’s action. That, of course, is still the case. However, the school district seems to have an issue of its own that is affecting its credit rating, at least for the time being. Moody’s Investors Service has withdrawn certain A2 and A3 ratings for the school district’s general obligation bonds and certificates of participation, respectively. Moody’s cited insufficient information to maintain the rating. The district is running behind on providing up-to-date audited financial statements; in such instances, it isn’t uncommon for a rating agency to withdraw its ratings until the information is provided. We can’t predict, once the financial statements are available, whether the ratings will stay the same or face a downgrade. In any event, it would behoove the district to get this issue addressed. As Moody’s noted, up-to-date information is more important than ever given the state’s difficult funding situation for local school districts.
(Dec. 7, 2011) -- Considering that the City of Vernon recently had to fend off legislation seeking its disincorporation, a one-notch downgrade for its electric system revenue bonds probably doesn’t seem a big deal. Moody’s Investors Service downgraded Vernon’s more than $400 million of existing electric bonds to Baa1 from A3. “The rating downgrade reflects weaker than expected operating results for 2011 and our expectation that similarly weak results are likely to persist at least through 2014,” Moody’s said in a report. “This weaker than expected operating performance is due to the utility’s stagnant power demand which has fallen significantly short of prior projections and suppressed revenue growth.” The Baa1 rating also applies to the city’s upcoming sale of tax-exempt and taxable electric system revenue bonds. Vernon’s utility is important to the city because it serves a large industrial base. In that regard, the utility still has many strengths and the outlook is “stable,” Moody’s said. “The long term rating continues to benefit from the enterprise’s still strong cash position; the favorable competitive position of the utility with very low rates; the absence of a city utility users tax and a generally business friendly environment; the inherent operational strength of the utility, reflected in part in a relatively flat load profile; and the shortness of the duration of much of the debt,” Moody’s said. The defeated bill to disincorporate Vernon has little impact on the rating, the rating agency added. However, a series of reforms in response to the bill should improve oversight and transparency in Vernon’s operations, Moody’s said.
(Dec. 6, 2011) -- Last May the Golden State Tobacco Securitization Corp. said it would probably have to use certain reserve funds for municipal tobacco settlement bonds to cover interest payments on December 1, 2011. We forgot to mention there were disclosure documents last week confirming that these reserve draws did indeed occur. However, some explanation is needed because investors have to keep their bonds straight. The Golden State issuer used almost $5 million of the reserve fund to help meet about $68 million of interest due on Series 2005A bonds. In addition, the Golden State issuer used about $7 million of reserves to help cover an $88 million Series 2007 tobacco settlement bond interest payment. This is where you have to keep your bonds straight. The Series 2005A bonds have extra security that many tobacco bonds didn’t; they are ultimately backed by a state appropriation. That state backing also helped these bonds get insurance backing. As a result, the Series 2005A bonds are still carrying higher underlying credit ratings of BBB+ (and if we recall A2 from Moody’s). In contrast, the 2007 bonds don’t have the state appropriation backing as the ultimate security. Some of the earlier maturities in that deal are still rated BBB but the longest maturities are rated as low as BB+. Insufficient tobacco settlement from participating tobacco makers last April led to the need for the reserve draws. Smokers have cut back more than expected on tobacco use, one reason the settlement revenue has come in less-than-expected. In addition, some of the settlement revenue has been placed in a special account because tobacco makers dispute the total they need to pay. The market has known about this for some time; it is just important to keep your bonds straight when you hear about these events. In addition, shorter- and even intermediate-maturity bonds in many deals are probably better off than the longest maturities of 30 or 40 years or whatever. When tobacco settlement bonds rebounded a few years ago and traded at par or better, we suggested “conservative” investors holding them might want to exit the bonds if it made them feel more comfortable. However, even then we noted it depended which bonds you owned. If it matures in a few years a “conservative” investor still could see these as a safe investment. (Many “conservative” investors didn’t buy these in the first place because they are non-traditional municipal bonds; some might have bought the 2005 issue because the state appropriation provides far more safety.)
(Dec. 5, 2011) -- Our weekly summary was abbreviated the other day. Here are a few other yield examples from recent bond sales. Mount Diablo Unified School District general obligation refunding bonds (Aa3) yielded 1.60% in five years and 2.87% in 10 years. Also priced in recent days, the Los Angeles County C.F.D. No. 3 special tax (Mello Roos) Improvement Area B refunding bonds (A+) provided a tax-exempt yield of 2.60% in five years, 3.82% in 10 years, and 4.58% in 15 years. Romoland School District C.F.D. No. 2004-1 Mello-Roos bonds yielded 3.75% in five years and 4.90 in 10 years. The 15-year bond yielded 5.65%. Rancho Santiago Community College District G.O. bonds (Aa2 and AA) yielded 1.57% in five years and 3.04% in 11 years. A Nevada Irrigation District financing authority sold revenue bonds (AA+). A bond due in March 2017 yielded 1.73%. A bond due in March 2022 was bought at a 2.85% yield. The March 2027 maturity traded at a 3.85% yield.
(Dec. 1, 2011) -- The parade of nonprofit health systems taking advantage of low tax-exempt rates will continue into December. Sutter Health expects to sell $355 million of tax-exempt bonds, with the biggest chunk of them being issued through the California Health Facilities Financing Authority. A smaller part will be sold by the California Statewide Communities Development Authority. A preliminary official statement is already circulating for the planned sale and pricing is expected in early December. More than one-third of the proceeds will fund Sutter’s continuing capital plan. The rest will refund certain older securities from the late 1990s or 2000. Following this bond issuance Sutter will maintain a 100% fixed-rate debt portfolio, Fitch Ratings said. Some health systems, in contrast, have used bigger chunks of variable-rate bonds, a strategy with both risks and rewards at times. Fitch rates the new bonds AA-minus. Sutter Health serves patients in more than 100 northern California cities and towns.
(Nov. 29, 2011) -- A couple apartment projects saw their municipal bonds downgraded by Standard & Poor’s in recent days. Certain apartment buildings have been funded by tax-exempt bonds when a set percentage of units were set aside for lower-income residents. California Statewide Communities Development Authority Series 2002E-1 senior multifamily housing revenue refunding bonds (Quail Ridge Apartments project) were downgraded to BB- from BB+. The subordinate 2002E-3 bonds dropped to B from BB-. The rating reflects the project’s declining debt service coverage levels, decreasing income, and increasing expenses,” S&P said. “Further dampening the rating is the project’s weak occupancy rates, although they are improving,” S&P added. The outlook is “negative.” The 360-unit apartment complex was built in 1980. It consists of 32 two-story buildings in Rialto, California, according to the official statement. Separately, Orange County apartment development revenue bonds Series 1998C (Orange Gardens Apartment Project) dropped to BB- from BB. “The rating action reflects our analysis of updated financial information based on our current stressed reinvestment rate assumptions for all scenarios as set forth in the related criteria articles,” S&P said. “We believe that revenues from mortgage debt service payments and investment earnings will be insufficient to pay the final debt service and fees on the bonds.” However, credit weaknesses are mitigated in part by the “very strong credit quality of the assets,” including a Fannie Mae pass-through certificate. Investors holding such bonds should check into such situations more closely to understand what is happening with the standalone projects and whether any other guarantees are in place to cover shortfalls.
(Nov. 23, 2011) -- The City of Benicia's 2002 water revenue refunding bonds have been downgraded two notches, to A+ from AA, by Standard & Poor's. Benicia's decreased debt service coverage during the last three years for the 2002 bonds, along with state loan debt service, prompted the downgrade, S&P said. The outlook is "negative." Benicia is working to manage water system costs and is conducting a water rate study, S&P said. The outlook could be revised to "stable" if action is taken to bring revenue in line with ongoing costs and boost debt service coverage. On the other hand, the rating could be dropped lower if operating revenue continues to fall short of operating expenses and debt service during the next two years, S&P said. It appears about $5 million of the 2002 bond issue is still outstanding. Ambac provided bond insurance on the deal.
(Nov. 22, 2011) -- We didn’t mention it in the item below, but San Jose Redevelopment Agency housing tax allocation bonds remained at single-A from Standard & Poor’s and have a “stable” outlook. The housing bonds need to be kept separate from the non-housing TABs, which were downgraded yesterday. The stable outlook on the housing bonds “reflects our anticipation that the project area will maintain at least good coverage of maximum annual debt service based on the broad project area tax base over the two-year outlook horizon,” S&P said. The housing bonds were removed from CreditWatch because of the resolution of the letter-of-credit issue discussed in the item below.
(Nov. 21, 2011) -- San Jose Redevelopment Agency non-housing tax allocation bonds saw another downgrade as Standard & Poor’s today cut the senior debt to BBB from BBB+. The bonds have a “negative” outlook because of the amount of outstanding assessed value still under dispute as of fiscal 2011. “The rating change reflects our view of the tighter maximum annual debt service coverage, as a result of assessed value declines in the past few years,” S&P said. The bonds are off a warning list for downgrade after JPMorgan Chase amended existing letters of credit with the trustee for certain subordinate bonds. The bank extended the termination dates for the LOCs to next July from this November. The extension had been in question because redevelopment agencies are in limbo until the California Supreme Court rules on new laws affecting the future of redevelopment in the state. Assessed valuation declines have led to tax allocation bond downgrades for other local redevelopment agencies. The San Jose agency is noteworthy because it has such a large amount of TABs (more than $2 billion). Fitch Ratings and Moody’s Investors Service earlier this year also downgraded a large chunk of San Jose TABs to triple-B levels.
(Nov. 19, 2011) -- The underlying rating on Soledad Community Healthcare District general obligation bonds has been cut to single-B, a six-notch downgrade from BBB, according to Standard & Poor’s. “The rating action reflects our view of the district’s diminished flexibility owing to a persistently thin cash position and a lack of focused senior financial staff,” S&P said. The district owns and operates the Eden Valley Care Center, a 59-bed skilled nursing facility in Soledad. It also runs the Soledad Medical Clinic, an outpatient rural family practice facility. The district’s very small size and revenue base are other factors in the rating. The outlook is “stable” at single-B and a MediCal payment rate increase will eventually help boost revenue, S&P said. It appears the district sold less than $3 million of G.O. refunding bonds in 1998. They were insured by Ambac. Something worth noting: Other healthcare districts that recently encountered more serious problems still kept up on G.O. bond payments (including a couple that filed for bankruptcy). The general obligation pledge provides an important source of security.
(Nov. 18, 2011) -- Certain bonds tied to the City of Hercules have been taken off a list for possible downgrade by Standard & Poor’s. However, S&P noted that the city still faces budget struggles and has a “negative” outlook on the debt. The issues that had been on CreditWatch were Hercules Public Financing Authority revenue bonds series 2010 (electric system project); series 2003B lease revenue bonds, and series 2009 taxable lease revenue bonds (Bio-Rad Project). The rating on these bonds was affirmed at A-minus, S&P said. “Significant” budget cuts have helped Hercules bring spending into line with revenue, though it is still relying on one-time sources, S&P said. The city still has exposure to “liquidity and leverage constraints” across all of its funds that have to be resolved, the rating agency added. Hercules is located 23 miles northeast of San Francisco. The location is a plus for “good access to the large and diverse Bay Area economy, S&P said.
(Nov. 18, 2011) -- This week we have mentioned that California is falling short of its revenue forecasts, a development that increases the odds of a mid-year budget cut. Any necessary cuts will be announced in mid-December and go into effect in February 2012. What will be the implications of the cuts for municipal bond issuers? Fitch Ratings this week took a stab at giving a preview. At the state level Fitch already incorporated the trigger cuts into its credit analysis and considers the reductions a positive response to lower revenue. An entity such as the University of California also has the resources to weather expected mid-year cuts, Fitch said. One of the main impacts could be on certain local school districts because of their reliance on state funding. “Fitch has been factoring in the risk of trigger cuts to its ratings of school districts since the state budget was adopted in June,” the rating agency said. “If implemented, Fitch plans to review school districts on Negative Rating Outlook and districts with already limited fund balance levels or other indications of weak financial flexibility.” We also believe the rating agency gave a good summary of the situation and we run an extended quote from Fitch to close this item: “The state’s weak and uncertain budget situation has long been a factor in Fitch’s school district analysis. Some districts have seen their credit quality erode: since the beginning of 2010 Fitch has downgraded ratings on 14% of the California school districts it rates, while 22% currently have Negative Rating Outlooks. However, most have retained sufficient flexibility given their rating levels. While many districts would have to use fund balance to offset the majority of the cuts in the near term, Fitch believes that offsetting management actions in fiscal 2013 will protect the credit quality of most. Given the state’s ongoing budget difficulties and education funding’s large share of the state budget, districts will continue to be under pressure to manage depressed revenues, reduced reserves and limited remaining expenditure flexibility.”
(Nov. 17, 2011) -- We mentioned recently that Moody’s Investors Service had assigned a MIG 2 rating, its second highest, to a City of Montebello tax and revenue anticipation note sale. The small $2.5 million sale was worth mentioning only because Montebello faced some publicized budget problems this year; the city has since made progress in addressing the situation. Even so, Montebello paid a price for the budget squeeze. According to a city press release, the notes had to yield 4.85% in the private placement to two investors. They mature in June 2012. That is some kind of yield premium for a short-term sale. In the release, Montebello also said the California Department of Finance approved Montebello’s redevelopment agency appeal to lower its annual tax increment payment to the state. This saved the city almost $1.24 million in payments to the state and increased available funds for further economic development. In other positive news for Montebello yesterday, Standard & Poor’s lifted a downgrade warning for Montebello Community Redevelopment Agency senior-lien and subordinate-lien tax allocation bonds. The bonds had been placed on CreditWatch with negative implications last May. The underlying rating on the senior bonds is A-minus and on the subordinate Series 2009A bonds, BBB+. S&P affirmed those ratings and said the outlook is “stable.” S&P said it removed the downgrade warning “due to the subordination of retroactive housing set-aside payments to the bonds. Furthermore, we have received confirmation that the agency made its Supplemental Education Revenue Augmentation Fund payments to the state on time.” The senior-lien bonds benefit from strong maximum annual debt service coverage and minimal fluctuation in incremental assessed valuation, S&P said. The agency also is operating “under more stringent internal controls,” S&P added.
(Nov. 15, 2011) -- When 2011 dawned, the Chicken Littles predicting widespread financial chaos for municipal bonds included expiring letters of credit for variable-rate debt as a big concern. Yesterday, Moody’s Investors Service noted that U.S. public finance issuers silenced the skeptics. They have found solutions during the first three quarters of 2011 for all the expiring letters of credit and liquidity facilities supporting variable-rate bonds, at least based on deals rated by Moody’s. “The unprecedented volume of bank facility expirations in 2011 coincides with a challenging economic backdrop,” Moody’s said. “Despite continued pressure on both municipal issuers and banks, issuers across sectors and credit profiles found a variety of options to address their expiring facilities.” There were a large number of expirations this year because of huge variable-rate bond issuance in late 2007 and 2008. The results so far in 2011 bode well for 2012, another big year for such expirations, Moody’s said. On about three-quarters of the expiring facilities, issuers succeeded in having them extended or substituted another provider. For the remainder, most issuers either replaced variable-rate debt with new bond sales and private placements, or obtained direct loans from banks instead.
(Nov. 14, 2011) -- The City of San Jose’s $1.2 billion of senior airport revenue bonds were downgraded to A-minus from A by Standard & Poor’s. The downgrade occurred ahead of a planned tax-exempt and taxable offering of San Jose airport bonds. The lower rating “reflects our belief that, even if the airport is able to meet or slightly exceed its financial projections it would not be enough to offset the airport’s extremely high debt load, which is among the highest of the airports we rate,” S&P said. The airport’s operating and financial profiles have reached the point where they aren’t consistent with an A rating, “given the airport’s very high debt burden, high airline cost structure, marginally adequate cash flow coverage, weaker competitive position, lower demand, and limited future financial flexibility.” There have been signs of economic improvement in the region, but the airport could be hurt if that growth sputters, the rating agency said.
(Nov. 9, 2011) -- Moody’s now considers the City of Stockton a triple-B credit, no matter what rating you look at; the city’s issuer rating, a proxy for a general obligation bond, has been cut to Baa1 from Baa2. Stockton’s lease revenue bonds, Series 2006A, were cut to the lowest investment-grade level, Baa3, from Baa2. The city’s taxable pension obligation bonds fell to Baa2 from Baa1. Moody’s lists as a strength the fact that the city’s staff and council are committed to achieving structural budget balance, Even so, “the downgrade and negative rating outlook reflect the fact that the city’s precarious financial position is being severely challenged by recent events,” Moody’s said. “These events threaten to increase general fund (GF) costs to levels beyond what the city’s carefully balanced budget could afford.” Stockton has “low debt levels but substantial variable rate risk,” Moody’s said. The city’s large tax base is a plus, though the area is “economically challenged” following the recession. “The city has been resolute to date in addressing its financial difficulties,” Moody’s said. “However, the potential challenges keep mounting, and increasing in size. The city's willingness to make more, substantial expenditure cuts may be severely tested if these new challenges materialize in substantial amounts.”
(Nov. 4, 2011) -- City of Santa Ana certificates of participation tied to a 1998 city hall expansion project have been downgraded two notches, to Baa1 from A2, by Moody’s Investors Service. Less than $10 million of the COPs remain outstanding. Santa Ana’s weakened financial position caused the downgrade, according to Moody’s. “Although the city recognizes the urgency of the need to balance its budget, the budget gap for fiscal 2013 remains wide and difficult to bridge,” Moody’s said. “Other than significant budget cuts, including public safety, the tools available to the city are limited. With further depletion of reserves likely in fiscal 2012, the city’s General Fund flexibility is extremely narrow.” Moody’s has a negative outlook on the COPs, which “reflects the likelihood of further credit deterioration before steps by the city can effectively stem expenditure growth, restore structural balance to the budget and restore reserves to previous levels.” Despite the downgrade, Santa Ana’s “ size and location in Orange County remain positive credit factors as does the city’s manageable debt position,” Moody’s added.
(Nov. 3, 2011) -- In the third quarter Moody’s Investors Service said it downgraded more than five municipal bond issues for each one that it upgraded. This is a negative trend that also is being seen at other rating agencies. It isn’t, however, a surprise. Tax collection trends often lag what is happening in the economy. At the local level, for example, the impact of lower or stagnant property tax receipts is starting to become far more apparent. We also have been seeing a few more school district downgrades as other factors, including tighter state funding, affect local budgets. Despite the negative trend, it is worth noting that the rating changes still affect a minority of the overall rated universe for municipal bonds. We expect downgrades to keep exceeding upgrades for awhile longer thanks to a stagnant economy and lower real estate values.
(Oct. 31, 2011) --
Certain municipal tobacco bonds have been placed on CreditWatch
with negative implications after Standard & Poor’s updated
certain criteria for its ratings on such transactions. These
bonds are backed by a settlement with certain large tobacco
makers and rely on revenue that can change due to trends in
cigarette consumption and other factors. (You need to keep your
bonds straight: Some of the “classes” on CreditWatch are part of
a bigger deal and not all the maturities in the deal have been
placed on CreditWatch). S&P expects to make decisions within
three months on whether to downgrade the municipal tobacco bonds
it is reviewing. The CreditWatch
placements reflect revised assumptions for cigarette volume
declines, and the percent of the settlement paid into a disputed
payment account under a formula tied to market-share declines of
the participating manufacturers. S&P also revised assumptions on
the recovery amounts expected from the disputed payment account.
Cigarette shipments dropped 6.3% in 2010 to 304 billion from 325
billion a year earlier, according to state attorney generals’
figures. These shipments were almost 442 billion in 1999, around
the time the settlement was reached. “We believe that pricing
pressure, increased regulation, and the macroeconomic
environment have contributed to the rate of consumption
decline,” S&P said. A list of affected California deals by
this action is located here.
A list of affected California deals by this action is located here.
(Oct. 26, 2011) -- The City of Montebello received a MIG 2 rating from Moody’s Investors Service for a $2.5 million tax and revenue anticipation note sale. We mention a short-term rating for such a small sale because Montebello’s budget problems were highly publicized earlier this year. Since then, Montebello has taken steps to put its house in order. “The short term rating on the city’s notes reflects the generally favorable projected ending general fund cash balance for 2011-12, the reasonable assumptions underlying the cash flows and the availability of alternate liquidity,” Moody’s said. A MIG 2 rating is Moody's second-highest for a short-term municipal obligation. We believe Montebello had planned to sell the notes earlier, but delayed the sale after California’s controller issued an audit criticizing the city’s handling of certain transactions in the past. Montebello has taken issue with some of the audit’s findings and has needed time to reassure investors about its financial standing. We assume the issuance of the Moody’s rating means the TRAN sale is imminent. Moody’s also affirmed its Baa2 issuer rating on Montebello and its Ba1 rating on the city’s 2000 certificates of participation. “The long term ratings continue to reflect the city’s still very narrow [general fund] reserve position and the need for external borrowing for near-term cash flow needs,” Moody’s said. “It appears that city did make significant progress in restoring budgetary balance in 2010-11, and the 2011-12 adopted budget appears to be in balance, with an expected [general fund] surplus, which if realized, will restore some operating flexibility.”
(Oct. 21, 2011) -- Fresno’s credit rating was cut three notches by Moody’s Investors Service this week. We won’t spend much time recounting the reasons because Standard & Poor’s and Fitch Ratings already cut Fresno to a single-A level from double-A. Moody’s issuer credit rating on Fresno, a proxy of sorts for a general obligation bonds, fell to A2 from Aa2. The city’s lease-revenue bonds fell to Baa1 from A1. Fresno’s pension obligation bonds dropped to A3 from Aa3. “The downgrade reflects the city’s materially weakened financial position, exposure to a fragile local economy and limited ability to absorb additional budgetary pressure,” Moody’s said. “The city’s high fixed cost burden and increasing general fund subsidy for underperforming enterprise assets further constrain its flexibility.” Fresno remains single-A for its issuer credit rating because of “the city’s favorable position as the economic center of the San Joaquin Valley, comparatively resilient assessed valuation and well-funded pension system,” Moody’s added.
(Oct. 17, 2011) -- After more than one rating agency red-flagged a recent operating loss at Eisenhower Medical Center, it wasn’t a surprise to see a recent one-notch downgrade by Moody’s Investors Service. The Moody’s rating on about $400 million of municipal bonds for the center fell to Baa2 from Baa1. The downgrade and a negative outlook “reflects the large and unbudgeted operating loss incurred in FY 2011 as well as decline in balance sheet strength,” Moody’s said. “Although management is budgeting significant operating improvement in FY 2012, the setback in FY 2011 has reduced management’s operating flexibility and resulted in projections for FY 2012 that are weaker than was anticipated a year ago.” The medical center still has various strengths, including a strong brand name in Rancho Mirage and the surrounding area, Moody’s said. It also has made strategic investments to pick up market share.
(Oct. 12, 2011) -- There was good news and bad news for certain Coalinga Redevelopment Agency 2009 redevelopment bonds this week. For Series 2009A and Series 2009B bonds, the “good” news about a downgrade is that it was only one notch (to A-minus from A) by Standard & Poor’s. The outlook for those two series is “stable.” Assessed value declines over several years prompted the downgrade. “We believe project area diversity and good current maximum annual debt service coverage will protect somewhat against additional moderate assessed value declines,” S&P said. The bad news for Series 2009C TABs is a six-notch downgrade, from single-A all the way to BB. The downgrade on the 2009C bonds reflects “a cumulative 12.6% decline in total project area assessed value since fiscal 2009, coupled with a high volatility ratio for the statutory pass-through tax base, which has reduced debt service coverage by calculated pass-through revenue to below” one times, S&P said. On the plus side, the project area is a primarily residential area with what S&P considers a “diverse tax base.” The Series 2009C bond sale was only $645,000 and the one maturity is in 2023. The bonds were sold initially to yield a tax-exempt 6.3%. There weren’t any trades in the 2009C bonds for almost a year. Yesterday, however, someone sold $40,000 of them at about 2 p.m. and managed to get out at a little above par (with a yield below 6%). That is an interesting trade, especially for whoever was on the other side. Ouch!
(Oct. 10, 2011) -- Last week we noted that Fitch Ratings had issued a rating warning for San Jose Redevelopment Agency merged project area (non-housing) tax allocation bonds. Late Friday Standard & Poor’s also put its BBB+ rating on the bonds on CreditWatch with negative implications over the same issue. The downgrade warning stems from a letter-of-credit that is expiring November 26 on a $93.5 million subordinate variable-rate bond. The redevelopment agency can’t make certain changes needed to extend the letter-of-credit because of the state’s new redevelopment law, and the fact agencies are in limbo while awaiting a state high court decision (the October 6 item below includes more detail). S&P makes a point that the outstanding TABs on CreditWatch are still backed by a senior lien. That senior lien provides one level of protection. In addition, S&P said it was told by bond counsel that there are no provisions in the bond documents for a cross-default on the non-housing bonds, regardless of what happens with the subordinate variable-rate issue. Despite these safeguards, the “uncertainty” of the payment to the letter-of-credit provider and its effect on the agency prompted the rating review, S&P said. Even if the agency’s senior debt was downgraded, “the effects would be relatively modest,” S&P said. The San Jose agency is working on possible ways to deal with the expiring LOC.
(Oct. 7, 2011) -- A $483 million California State Public Works Board lease-revenue bond sale will get attention in the new-issue market next week. Expect decent yields since all three series are rated BBB+ by Standard & Poor’s and Fitch Ratings. Moody’s Investors Service rates Series B for various California State University projects Aa3; Moody’s rates the other two series A2 (for various capital projects and a corrections department financing). Looking for a higher-rated offering? Los Angeles County Metropolitan Transportation Authority will be pricing $245 million of Proposition A first tier senior sales tax revenue bonds. Standard & Poor’s rates the bonds AAA and Moody’s Investors Service, Aa2. The Lodi Unified School District expects to price $42 million of general obligation refunding bonds with an A+ rating from S&P and an AA-minus grade from Fitch Ratings. Among smaller offerings, the Corona-Norco Unified School District plans to sell $22 million general obligation bonds with an AA-minus rating from S&P. The Shasta-Tehama Joint Community College District expects to price $8 million G.O. refunding bonds with Aa2 and A+ ratings. Also, a preliminary official statement is circulating for a $21 million bond sale on behalf of Southwestern Law School. The bonds are rated Baa1 by Moody’s and will be issued by the California Municipal Finance Authority. This is a general preview of next week’s possible sales; more might be in the works, including refunding deals that can be sensitive to interest-rate movements.
(Oct. 6, 2011) -- The State of California’s new redevelopment law is already having unintended consequences, even as the market awaits an important California Supreme Court ruling in January on the legality of certain provisions. State officials have stressed that the new law, which restricts future redevelopment activity, won’t (and can’t) prevent agencies from meeting payments on existing tax allocation bonds. While that might be the case, that doesn’t mean downgrades can be avoided while the law gets sorted out. Fitch Ratings yesterday said it might downgrade $1.8 billion of San Jose Redevelopment Agency merged project area (non-housing) tax allocation bonds, but the warning wasn’t triggered by something directly tied to these senior bonds. (They are rated BBB-minus so a downgrade would drop them below investment grade.) Rather, the warning stems from a letter-of-credit that is expiring November 26 on a $93.5 million subordinate variable-rate bond. The redevelopment agency can’t make certain changes needed to extend the letter-of-credit because of the new redevelopment law, and the fact agencies are in limbo while awaiting the high court decision. Special legislation that would have let the San Jose agency make changes was vetoed the other day by Governor Jerry Brown, who wants to wait until the state’s high court acts. If the LOC expires, investors holding the variable-rate debt will get paid off by the bank. But that action could also lead to an acceleration of the variable-rate issue by the bank, and that potential financial pressure is what prompted Fitch to put all the senior TABs on a downgrade warning list. Moody’s Investors Service has also said the senior bonds could face added credit pressure if the variable-rate issue is accelerated. Important note: the San Jose agency’s $350 million of housing set-aside TABs aren’t affected by the downgrade warning and remain single-A with a stable outlook, Fitch said. The San Jose agency is looking at other possible avenues for addressing the expiring LOC; it believes the bank could unilaterally act to extend the LOCs, but the bank apparently doesn’t hold that view.
(Oct. 4, 2011) -- The stagnant economy continues to take a toll on areas of the state that once saw growing budgets linked to growth. The City of Fresno is the latest to pay a price; Standard & Poor’s has downgraded its bonds by three notches. The city’s $365 million of lease-revenue bonds fell to A-minus from AA-minus and its “issuer credit rating” fell to A from AA. Despite a fiscal 2012 balanced general fund budget, “persistent structural imbalance has resulted in the city’s significantly weakened financial position,” S&P said. Among other things, Fresno has almost drained an emergency reserve that helped balance the general fund in past years, S&P added. The rating agency has a “negative” outlook on Fresno because the city has less flexibility if revenue is less than expected.
(Oct. 4, 2011) -- Stockton Public Financing Authority 2006A and 2006B revenue bonds (redevelopment projects), which were sold on behalf of the Stockton Redevelopment Agency, have been downgraded to B from BB by Standard & Poor’s. The “adverse” regional real estate market conditions continue to hurt assessed valuations. A “negative” outlook reflects concern that assessed valuations will remain under stress for all project areas supporting the debt, S&P said. Keep your bonds straight. The Stockton P.F.A. has sold various bonds with varying credit quality. The ones we mention above specifically refer to redevelopment projects in the title on the Official Statement. Stockton P.F.A. 2006C revenue bonds (housing projects) only were downgraded one notch, to BBB-minus from BBB, by S&P. The 2006C bonds face similar pressure from assessed valuation changes but still have higher annual debt service coverage ratios than the other series discussed above. Radian Asset Assurance insured the bonds discussed above. Radian Asset’s financial strength is graded Ba1 by Moody’s Investors Service and BB-minus by S&P.
(Oct. 4, 2011) -- The “underlying” rating on Mendocino Coast Health Care District general obligation bonds has been cut two notches, to CC from B-minus, by Standard & Poor’s. The downgrade reflects the district’s “weakened cash and financial position” due to weak operating performance from fiscal 2009 through fiscal 2011, S&P said. The local economy also has below-average wealth indicators and “unfavorable demographics,” S&P added. An “underlying” rating means that the bonds were guaranteed by a bond insurer. You might want to check which bonds you own in this case to see who the insurer was. Some of the former insurers, such as FGIC, had their policies taken over by other companies (MBIA’s new public finance subsidiary took over the FGIC policies).
(Oct. 3, 2011) -- This week’s planned new municipal bond sales in California offer a little for everyone. A $107 million tax-exempt bond sale this week on behalf of Trinity Health gives investors an opportunity for diversification into a higher-rated issuer in the health care sector. The bonds are rated double-A across the board (Moody’s Investors Service, Standard & Poor’s, and Fitch Ratings). The California Statewide Communities Development Authority is issuing the bonds. In contrast, investors seeking higher yields will find them with a BBB+ deal on behalf of Episcopal Senior Communities. An ABAG nonprofit financing authority is selling $62 million of tax-exempt revenue refunding bonds for the Episcopal group. Want a traditional high-rated municipal bond? The Tamalpais Union High School District plans to sell $37 million of general obligation refunding bonds. S&P rates them AAA. The Ohlone Community College District this week expects to price $80 million of G.O. bonds with Aa2 and AA ratings. Speaking of high-rated issues, the California Department of Water Resources also is on this week’s sales calendar with a Central Valley Project water revenue bond rated Aa1 and AAA. The Moorpark Unified School District will offer $21 million of general obligation bonds with Aa3 and A+ ratings; Assured Guaranty Municipal is expected to insure these bonds. A couple other small G.O. deals also are lined up this week from the Fruitvale and Mountain View school districts. On Wednesday the San Leandro Unified School District will competitively sell $7 million of G.O. refunding bonds; they are rated Aa3.
(Sept. 28, 2011) -- Since it is always easiest to gravitate to multi-notch downgrades as the only credit rating change worth mentioning, let’s throw in an upgrade as well. It is only a one-notch upgrade, to A2 from A3, for Children’s Hospital Central California. But the outlook remains “positive,” indicating the rating could move up again if performance trends continue. Moody’s Investors Service, in the upgrade, cites “solid operating results and the “strongest performance in recent history” for a recent 10-month fiscal period. The nonprofit Madera-based health provider says it is the second-largest children’s hospital in California. The upgrade applies to $161.6 million of certificates of participation issued for the hospital by Madera County.
(Sept. 26, 2011) -- The Rosedale-Rio Bravo Water Storage District in Kern County saw its certificate of participation credit rating drop three notches as it gets ready to sell $16 million of these securities this week. A growing debt load and lower debt service coverage prompted S&P to downgrade the district’s existing COPs to A+ from AA+, Standard & Poor’s said. The A+ rating also applies to the new COPs sale. The downgrade “reflects our view of the district’s significantly increased debt load as a result of borrowing to finance a land acquisition, materially diminished projected debt service coverage of 1.1x from over 2.0x, limited rate-setting control over the majority of its revenues, and uneven financial performance demonstrated by negative net revenues in 2010,” S&P said in a report. The A+ rating, in the middle of investment-grade territory, reflects adequate debt service coverage and an expectation the water district doesn’t plan any additional borrowing in the next five years, S&P said. The COPs will refund water revenue warrants that financed a 2,070-acre land purchase; the property will expand the water district’s recharging, storage, and recovery capacity, S&P said.
(Sept. 22, 2011) -- The underlying rating on Anaheim Public Financing Authority 2007A-1 and 2007A-2 lease revenue refunding bonds has been cut to BBB+ from single-A by Standard & Poor’s. The downgrade also applies to 2007B taxable bonds. The two-notch cut reflects a decline in revenue tied to lease payments, including sales taxes, hotel taxes, and certain property tax increment. These revenues declined by a cumulative 23% in fiscal years 2009 and 2010, S&P said. A “heavy reliance” on Disneyland and related resort property helped lower the revenue because of a tourism drop. “The stable outlook reflects what we view as the recent recovery of regional tourism trends,” the rating agency added. It appears the bulk of these downgraded bonds were insured by FGIC; subsequent to that MBIA reached an agreement to take over the FGIC guarantees.
(Sept. 21, 2011) -- Earlier this week Moody’s Investors Service downgraded California Housing Finance Agency home mortgage revenue bonds to Baa from Baa1. The move affects about $5 billion of bonds. This is the latest of a continuing round of downgrades for these bonds and the reasons remain the same: mortgage delinquencies and foreclosures in a weaker housing market. In addition, as noted before, the downgrade of Genworth Mortgage Insurance Corp. has been a factor because that company reinsures a good chunk of mortgage loans (40%) that help back the bonds. The housing agency also has a “high level” of exposure to variable-rate debt, Moody’s said, which poses risks related to credit and liquidity facilities. Keep your bonds straight. The senior unsecured rating of the housing agency dropped to A3 from A2, Moody’s said. That A3 rating applies to $122 million of housing program bonds and $922 million of multifamily housing revenue bonds III, Moody’s said.
(Sept. 17, 2011) -- California’s $2.5 billion sale of tax-exempt general obligation bonds will get most of the attention next week (the week of September 19 to 23) in the new-issue market. After the state sale concludes, however, a few other issuers are expected to price deals during the week. On Thursday, September 22, competitive bids from underwriters will be taken by a couple local school districts. The Riverside Unified School District is offering $51 million of G.O. refunding bonds with Aa2 and A+ credit ratings. Also on Thursday, the Yosemite Unified School District is taking bids on $8 million of G.O. refunding bonds with a single-A rating. Among negotiated sales, where the underwriter is selected ahead of time, the San Mateo – Foster City School District expects to price $14 million of general obligation refunding bonds. They are rated double-A (Aa2 and AA). The Novato Unified School District plans to sell $24 million of G.O. refunding bonds with Aa2 and AA ratings. Looking for some added yield? Roughly $100 million of tax-exempt bonds could also be priced during the week on behalf of private Chapman University. Moody’s Investors Service rates the bonds A2 and they will be issued through the California Educational Facilities Authority.
(Sept. 15, 2011) -- The Eisenhower Medical Center in Rancho Mirage has received another downgrade warning. Municipal tax-exempt bonds backed by the center are now on Rating Watch Negative by Fitch Ratings, which currently rates the debt A- minus. The warning “is due to the significant decline in Eisenhower Medical Center's unaudited financial performance since Fitch's last review in July 2010,” the rating agency said in a release. Moody’s Investor Service in August said it might downgrade the center’s bonds; Moody’s rates them Baa1. About $400 million of debt is affected by the rating review. “Fitch expects to have a discussion with management by the end of September and will update the rating at that time,” the rating agency said.
(Sept. 13, 2011) -- Our preview of this week’s bond sales included the California State University deal for $245 million of systemwide revenue bonds. We also noted that Standard & Poor’s changed its outlook to “positive” from “stable,” but that fact is worth highlighting separately. “The positive outlook is based on our view of CSU's fundamental institutional credit strengths, including its strong management team with good fiscal planning and policies in place and history of consistently positive financial operations on a full-accrual basis,” S&P said. These factors are helping the CSU system despite a constrained state funding environment, S&P said. If the “positive” outlook eventually leads to an upgrade it would bring the CSU bonds up to double-A. Right now S&P rates them A+ and Moody’s Investors Service, Aa2.
(Sept. 9, 2011) -- State funding deferrals to help California deal with its own budget issues are affecting localities, including schools. One example of how this can cause a negative impact occurred this week, as the Temecula Valley Unified School District’s general obligation bonds were downgraded one notch to A1 from Aa3 by Moody’s Investors Service. The downgrade affects $33.5 million of debt. “The downgrade reflects the district’s significantly weakened cash position and increasing reliance on the short-term note market for liquidity,” Moody’s explained. The district has increased short-term borrowing to bridge cash flow gaps from state funding deferrals, Moody’s added. For example, during the last three fiscal years the Temecula district has issued tax and revenue anticipation notes in two stages. It plans to do so again in fiscal 2012, with a second TRAN sale of $30 million in March 2012, Moody’s said. “The district’s persistent and increasing use of the TRAN market to sustain ongoing operations entails market access risks as well as liquidity and financial flexibility risks,” Moody’s said. On the plus side, the G.O. bonds benefit from a large property tax base and a low debt burden. Moody’s has a “negative” outlook on the bonds due to the district’s reliance on short-term borrowing “absent implementing significant expenditure cuts” or the state reducing deferrals.
(Sept. 2, 2011) -- Assessed value declines prompted a multi-notch downgrade by Standard & Poor’s on Cathedral City Public Financing Authority Merged Project Area tax allocation bonds. Several series with a senior priority on tax increment fell to BBB from A. Subordinate lien (on non-housing tax increment revenue) Series 2007C bonds dropped to BB from BBB-minus. “The downgrade reflects continued declines in assessed values, which have led to decreased coverage ratios over debt,” S&P said. A very large and diverse project area that covers all of Cathedral City remains a plus for the bonds, and the outlook is “stable,” S&P said. According to S&P, the stable outlook reflects an expectation “that adequate debt service coverage continues for the senior bonds, there continue to be sufficient cash reserves to fund deficits of the subordinate bonds, that taxpayer diversity will continue, and that there will be moderate assessed valuation declines in the next year or two.”
(Sept. 2, 2011) -- Less than six percent of the municipal credits rated by Moody’s Investors Service have seen rating changes after the severe economic downturn. “The vast majority of U.S. public finance ratings have held their ground in the wake of the Great Recession,” Moody’s said. The bulk of the rating changes since January 2010 have been downgrades, but most of them have been one-notch cuts rather than deeper revisions. Downgrades of more than two notches “have been rare,” Moody’s said, and occurred in “economic-sensitive sectors.” For example, out of the 102 municipal downgrades of more than two notches since January 2010, about half were housing credits, Moody’s said. Municipal downgrades will probably exceed upgrades for another year amid a sluggish recovery. State tax revenues have been increasing from low levels recorded during the recession, but local property tax receipts have slowed as the real estate downturn sunk in.
(Sept. 1, 2011) -- Moody’s Investors Service has warned that a multi-notch downgrade of some redevelopment tax allocation bonds in California is possible unless the state’s high court blocks implementation of the new laws affecting this sector. All redevelopment bonds in California rated by Moody’s have been put on review for possible downgrade, making the California Supreme Court’s decision on the legislation a major factor to watch for bondholders. California Governor Jerry Brown, when he proposed doing away with future redevelopment efforts, stressed that existing tax allocation bonds couldn’t be impaired and would still be paid off. While that is still the case, Moody’s said the credit quality would drop because of the way the legislation is written. “The bill that would dissolve all redevelopment agencies, Assembly Bill 1X 26, does not require segregation and tracking of revenues pledged to individual tax allocation bonds,” Moody’s noted in a report. “It also changes the flow of funds that are allocated to bond debt service. These developments would severely diminish the bonds’ credit quality. If implemented as currently written, this legislation could result in multi-notch downgrades on bonds of the dissolved redevelopment agencies. This law was stayed by the state supreme court pending review.” Moody’s noted that the other part of the legislation affecting redevelopment agencies also raises issues. “Assembly Bill 1X 27, the second bill, would allow redevelopment agencies to remain in existence if their sponsoring city/county commits to making specific annual payments,” Moody’s noted. “This development would have more modest, but still negative credit implications for bondholders. The payments would most likely be made from the redevelopment agencies’ funds, weakening their balance sheets and operating flexibility. This law too was stayed by the court.” Bondholders also will want to watch whether state legislators do anything to alleviate these concerns. “The California legislature is considering a clean-up law in its current session, which ends September 9,” Moody’s said. “It is unclear, however, whether this legislation would address the risks to bondholders outlined above. The supreme court is targeting January 15, 2012 for a ruling on this case. Given these dates, it is possible that the review for downgrade will extend beyond Moody's typical 90-day time horizon.” About $11.6 billion of tax allocation bonds in California are affected by Moody’s review.
(Aug. 31, 2011) -- The pre-Labor Day lull in the municipal bond market also might affect the post-Labor Day activity for a few days. However, with tax-exempt rates so low, we expect the new-issue market will heat up a bit in September. For example, the Sacramento Municipal Utility District is lining up an electric revenue refunding bond sale of about $300 million, and Fitch Ratings has graded it A+. Also, California has set a size ($261 million) for the California State University systemwide revenue bonds expected on September 14. More deals from various issuers, especially to refinance older bonds, no doubt will come out of the woodwork soon.
(Aug. 26, 2011) -- Standard & Poor’s has published its updated criteria for rating bond insurers. What it hasn’t done yet is indicate how this will impact specific existing ratings. However, any such change also will depend on whether a specific bond insurer has taken steps to address the new criteria. Stock prices on certain bond insurers (Assured Guaranty Ltd. And MBIA Inc.) rose Thursday since the final S&P criteria are less stringent than originally proposed. Earlier this year, when S&P asked for comment on the new criteria, Assured Guaranty Ltd. had plenty to say about the proposal. This company’s subsidiaries are the most active players still in insuring municipal bonds, following sharp downgrades of other triple-A insurers after the financial crisis. Other market participants also commented on the criteria and S&P has made some changes in reaction to the comments. “In accordance with our policies and procedures, we will meet with senior management of the bond insurers to review the published criteria and discuss the impact the criteria may have on existing ratings,” S&P said in a release. “The discussion with the bond insurers will enable them to present any current plans they may have relating to the new criteria. The criteria are effective immediately, and we expect any rating changes to occur following our review of third-quarter 2011 financial statements, but no later than Nov. 30, 2011.” Among other things, the new S&P report says that the “maximum leverage allowable for a bond insurer to achieve and maintain a ‘AAA’ final rating is 75x. Leverage is defined as the ratio of net par exposure to capital, including surplus and contingency reserve. If an insurer exceeds the maximum leverage consistent with a ‘AAA’ final rating, the final rating can be no higher than ‘AA+’.”
(Aug. 24, 2011) -- It has been awhile since we flagged any Internal Revenue Service exams of tax-exempt bonds. Holders of such audited issues need to avoid panic selling because such exams either can be closed without any action, or the issuer will pay for a settlement to protect bondholders and keep the bonds tax-exempt. The City of Vernon has just disclosed that the IRS is reviewing its 2009 Series A electric system bonds. In a release, Vernon said it “believes that the Bonds complied with all applicable provisions of the Internal Revenue Code and the City will cooperate with the IRS in its examination of the Bonds.” As an aside, pending state legislation aims to disincorporate Vernon because of the way the industrial city has been governed in the past. However, some Los Angeles County supervisors and others are raising questions about the wisdom of disincorporation, putting the legislation’s future passage in doubt.
(Aug. 22, 2011) -- The Eisenhower Medical Center might face a downgrade from Moody’s Investors Service after unaudited results show an operating loss in fiscal 2011. The $31 million operating loss compares with an operating profit of about $23 million in fiscal 2010, Moody’s said. “Our review will focus on the factors behind the deterioration in the organization’s credit position and what steps management has taken in response,” Moody’s said. Moody’s corrected its release to note that the current rating is Baa1. In July 2010 Moody’s downgraded the Eisenhower center to Baa1 from A3. The watch list action affects $400 million of debt backed by the center, located in Rancho Mirage.
(Aug. 15, 2011) -- There is one more new bond sale planned this week that is worth mentioning, aside from those listed on our Research page in August 12 and 13 items. The Water Replenishment District of Southern California plans to sell $66 million of revenue certificates of participation. The pricing is planned this week, according to the district’s financial advisor on the deal, Fieldman, Rolapp & Associates. This deal has been our calendar for awhile and is noteworthy for AA+ ratings from Standard & Poor’s and Fitch. Although not a well-known name, the replenishment district was formed in 1959 to combat over pumping of two major groundwater basins in southern Los Angeles County. Proceeds from this sale will finance various improvements, included upgraded treatment of recycled water for use in groundwater replenishment.
(Aug. 10, 2011) -- An economic slowdown that reduced connection fees is a big factor in a four-notch downgrade of $94 million City of Clovis wastewater revenue bonds, according to Moody’s Investors Service. The rating dropped to Baa2 from A1 late Tuesday. “As a result of the economic downturn, connection fees dropped significantly from $6.6 million in fiscal 2007 to $1.7 million in 2010,” Moody’s said in a report. “Further stressing the system’s financial position is the completion of Clovis’ own treatment plant, for which the city issued a total of $95 million for in two issuances in 2005 and 2007, in addition to approximately the usage of $20 million of unrestricted cash reserves.” (The 2005 and 2007 bonds were rated A3 when issued and we assume benefited from ratings “recalibration” last year, a change that put some existing ratings at higher levels.) Debt service coverage is expected to remain at about 0.8 times through fiscal 2015, with Clovis using wastewater enterprise reserves to meet rate covenants. These reserves are currently estimated to cover more than three years of debt service. On the plus side, the city approved rate increases to strengthen debt service coverage. It also put a temporary sewer bond charge in place that can extend beyond 2015 if developer fees haven’t recovered sufficiently by that time.
(Aug. 9, 2011) -- Puerto Rico benefited last year from a ratings “recalibration” meant to align municipal bond ratings with “corporate” grades. Many municipal issuers saw their ratings rise (from Moody’s Investors Service and Fitch Ratings) to reflect their relatively lower default risk. Now, however, a Moody’s downgrade has put Puerto Rico general obligation bonds back into triple-B territory. (They were dropped to Baa1 from A3). The change reflects “the commonwealth’s continued financial deterioration of the severely underfunded retirement systems, continued weak economic trend, and weak finances, with a historical trend of funding budget gaps with borrowing,” Moody’s said. “Needed retirement system reforms, in our view, may exacerbate strains on the commonwealth’s economy and budgetary finances in the coming years.” The outlook is “negative” because of these factors. Among positive factors, Moody’s noted Governor Luis Fortuño’s commitment to budget discipline. There is “strong management dedication to tax and fiscal reform, including reducing the budget deficit,” Moody’s noted. Interest on Puerto Rico bonds is exempt from state and federal income taxes, making them a diversification and/or yield play for California residents. Fitch rates the commonwealth’s G.O. bonds BBB+; Standard & Poor’s earlier this year upgraded them to BBB from BBB-minus.
(Aug. 8, 2011) -- Tax-exempt bond sales by high-grade private universities have always been a good opportunity for diversification. Even prominent names aren’t immune from downgrades, however. Standard & Poor’s has downgraded University of Southern California bonds to AA from AA+ because of a growing debt burden. “The lowered ratings are based largely on our view of the rapid issuance of debt on the heels of two hospital acquisitions, the operations of which are not profitable, nor are expected to be for several years,” S&P said. USC is getting ready to sell $300 million of taxable bonds. (Moody‘s Investors Service still rates the bonds Aa1 with a stable outlook.) “With this issuance, the university will have more than doubled its debt in the last three years (fiscals 2008 through 2010),” S&P said. However, USC’s “resources (both cash and investments and expendable resources) have not grown at a similar pace, and corresponding ratios have actually decreased over that time.” The downgraded bonds were issued by California infrastructure and educational authorities.
(Aug. 5, 2011) -- The California Department of Water Resources appears to be readying a power supply revenue bond sale of as much as $1 billion. The state treasurer’s office is listing a potential sales date of August 17. Meanwhile, Standard & Poor’s today (August 5) released an AA-minus rating for the bond sale. S&P lists the sales size as $1 billion. The treasurer’s office doesn’t list a size, calling it “TBD” (to be decided).
(Aug. 4, 2011) -- The West Contra Costa Unified School District, once the source two decades ago of a much-publicized bankruptcy under its “old” name, has been upgraded to A+ from A by Standard & Poor’s. The school district has a preliminary official statement out to sell general obligation refunding bonds. “The ratings reflect our view of management’s ability to maintain strong reserves during a period of declining enrollment and continued state funding reductions through negotiated salary and benefit reductions and clearly defined budget actions to address declining enrollment,” S&P said in a report. Moody’s Investors Service rates the district a notch higher at Aa3 but maintains a “negative” outlook on the district, citing high debt levels and continuing budget pressure. Fitch Ratings grades the district A+ with a “stable” outlook. The district was once known as the Richmond Unified School District and filed for bankruptcy protection under that name two decades ago.
(Aug. 3, 2011) -- The City of Fresno’s weakened finances after the recession prompted a three-notch downgrade by Fitch Ratings this week. Lease revenue bonds dropped to A-minus from AA-minus and Fresno’s implied general obligation rating fell to A from AA. “The downgrades reflect a rapid erosion in the city’s financial position evidenced by use of the emergency reserve and low overall financial flexibility,” Fitch said in a report. “With a dependence on both property and sales taxes, management remains challenged in achieving structural budget balance as the tax base continues to decline and economic deterioration over the last several years shows little signs of recovery.” The rating outlook is “stable” at the new rating level. Fitch noted that “Fresno has made significant cuts in expenditures, gaining traction toward restoring structural budget balance in the general fund; however, the city’s fiscal 2012 budget continues to rely on unsustainable one-time budget solutions.”
(Aug. 2, 2011) -- The Port of Oakland has received occasional negative attention because of passenger traffic declines at Oakland International Airport. But it got some good news the other day. Standard & Poor’s changed its outlook to “positive” from “stable” on the Port of Oakland’s bonds, a sign an upgrade is possible within a year or two. S&P currently rates the port’s bonds single-A. The outlook change comes ahead of a planned $344 million revenue bond sale by the port, mainly we believe to refund certain existing debt. “The positive outlook is based on our view that over the next two years, the benefits the port receives from its long-range financial plan would lead to ratings that would be more consistent with a higher level,” S&P said in a statement. Port management has reduced expenses and also scaled back capital spending plans in response to the downturn in passenger and cargo traffic, S&P said. The port has more than $1 billion of outstanding bonds. Moody’s Investors Services rates the new refunding bonds and existing senior-lien debt A2.
(July 29, 2011) -- More than $2 billion of bonds connected with the Sacramento Municipal Utility District were upgraded by Fitch Ratings. The biggest chunk, about $2.1 billion of electric revenue bonds, rose to A+ from A. Subordinated electric revenue bonds also rose to A+ from A, as did Sacramento Cogeneration Authority and Central Valley Financing Authority bonds. Sacramento Power Authority and Cosumnes Project bonds rose to A- from BBB+. “The SMUD rating upgrade reflects the operational and financial improvement achieved over the last two years,” Fitch said in a release. “SMUD has increased its debt service coverage, boosted liquidity and placed itself on a much sounder financial footing to face the renewable and greenhouse gas (GHG) mandates in California. Aiding the recovery is the successful implementation of three rate increases totaling 13.25% between September 2009 and January 2011.” This one-notch upgrade is worth mentioning because of the amount of bonds affected. This utility district is a far different creature than it was oh so long ago, when the debate was over closure of the Rancho Seco nuclear power plant.
(July 25, 2011) -- The City of Stockton, much-maligned for its budget woes during the recession and housing decline, might be bottoming out in terms of downgrades. Not long after Moody’s Investors Service downgraded Stockton bonds by two notches, Standard & Poor’s made a one-notch cut late last week. S&P lowered Stockton’s issuer credit rating to A-minus from A. The city’s certificates of participation and lease revenue bonds fell to BBB+ from A-minus. “The rating action reflects our assessment of deeper-than-budgeted revenue declines in fiscal 2011 that exhausted the city’s available general fund balance, and cost reductions that we believe position the city to balance its operations for fiscal 2012,” S&P said. The outlook is “stable” based on the rating agency’s view “that the city’s progress in aligning its ongoing costs with weak revenue performance lays the groundwork for structural balance when economic growth returns.”
(July 22, 2011) -- We have discussed the City of Compton’s budget travails recently. Compton’s City Council earlier this week approved roughly 80 layoffs as part of its plan for a fiscal 2012 budget. That isn’t the end of the story. The city’s labor unions probably will challenge the council’s action on various grounds. The layoffs are set to occur in early August. A few weeks ago Standard & Poor’s lowered its “underlying” credit rating on City of Compton lease-revenue bonds by three notches, to BBB-minus from A-minus, because of a recent pattern of deficit spending. Deficits from fiscal 2008 to 2010 were about 20% of the budget for each year, S&P said. The rating agency left a “negative” rating outlook on Compton.
(July 19, 2011) -- After the City of Vallejo filed for bankruptcy protection, we took pains to note that bonds from legally distinct issuers weren’t affected. The main example was the Vallejo City Unified School District. The school district is a separate entity and wasn’t part of the bankruptcy. (Granted, having the word “city” in the district’s name might have caused confusion for some smaller investors). The Vallejo school district isn’t among the stronger in the state; for example, Standard & Poor’s has rated its bonds in the triple-B category. Last week S&P suspended the “underlying” ratings on the school district’s general obligation bonds and certificates of participation. The suspension was “due to the lack of current audited financial information, including fiscals 2009 and 2010,” S&P said. The rating agency added that it “may reinstate the suspended ratings after both public release and our analysis of financial statements that, in the opinion of an independent auditor, fairly present the district’s financial position, as well as comfort on any other matter that we may consider appropriate.” Such rating suspensions occur from time to time over delayed financial reports. The underlying rating refers to the school district’s credit strength on its own. The bonds also carry financial guarantees with a separate rating, based on the insurer’s strength.
(July 15, 2011) -- We noticed the other week from a rating assignment that a double-B new bond sale was pending. That isn’t something you see every week. Now the preliminary official statement is available. The City of San Buenaventura, commonly known as Ventura, is selling $346 million of revenue bonds on behalf of Community Memorial Health System. Bond denominations will be $100,000 instead of the typical $5,000 for higher-rated deals. The nonprofit health system is building a replacement hospital to serve the community. It decided to build a new facility rather than try to retrofit an older facility to meet stringent seismic standards for hospitals. Moody’s Investors Service rates the bonds Ba2 and Standard & Poor’s, BB.
(July 13, 2011) -- The inability of Los Angeles to bring its employee costs into line with revenue means bondholders took it on the chin again. Moody’s Investors Service downgraded Los Angeles general obligation bonds to Aa3 from Aa2. The downgrade affects $3.3 billion of city debt, including upcoming G.O. bond sales next week. Los Angeles judgment obligation bonds were cut to A1 from Aa3. Obligations secured by real property leases fell to A2 from A1. Obligations secured by capital equipment leases fell to A3 from A2. Five straight years of general fund deficits helped drive the downgrade, along with a slow economic recovery suggesting that city revenue will keep lagging expenditures, Moody’s said. The city has made some progress reducing a structural deficit. Even so, “currently scheduled labor compensation adjustments and projected retiree cost increases will continue to put pressure on the city’s general fund budget for the foreseeable future,” Moody’s said. From fiscal 2013 to 2015 Los Angeles can look forward to $328 million of increased pension-related costs and $151 million of higher costs for current employees’ compensation. “Faced with these cost pressures, the likelihood that the city will improve its reserve position over the next few years is very limited, leaving it well below Moody's medians for comparably rated cities,” the rating agency said. On the plus side, Los Angeles benefits from a massive and diverse tax base that provides an enormous cushion for its relatively moderate debt levels. Standard & Poor’s and Fitch Ratings grade Los Angeles G.O. bonds AA-minus.
(July 11, 2011) -- Moody’s Investors Service initially published an incorrect rating on this downgrade mentioned July 11. Moody’s has since issued a correction. Moody’s has downgraded the Los Angeles County Metropolitan Transportation Authority’s $1.2 billion of Proposition C Sales Tax Revenue Bonds to Aa3 from Aa2.
(July 11, 2011) -- Public finance downgrades exceeded upgrades by about a three-to-one margin in the April to June 2011 period, Moody’s Investors Service said. That is the 10th straight quarter downgrades exceeded upgrades. “The trend is a reflection of the ongoing fiscal challenges facing the municipal sector,” Moody’s said in a release. “All major municipal sectors will continue to face pressure over the near to medium term as the economy continues its slow recovery.” There were 170 public finance rating changes by Moody’s in the second quarter, with 127 downgrades and 43 upgrades. The downgrade-to-upgrade ratio peaked at 4.6 to one in the fourth quarter of 2010, Moody’s said. A rebound in tax revenue often lags an economic recovery and property value declines are still sinking in for many localities.
(July 11, 2011) -- We mention this one-notch rating change only because of the dollar-volume of bonds affected. Moody’s Investors Service has downgraded the Los Angeles County Metropolitan Transportation Authority’s $1.2 billion of Proposition C Sales Tax Revenue Bonds to Aa3 from Aa2. (Keep your bonds straight: Moody’s affirmed the Aa2 ratings of the Proposition A First Tier Senior Sales Tax Revenue and Measure R Sales Tax Revenue Bonds.) Moody's also cut $166 million of General Revenue Bonds to A1 from Aa3. “The downgrade of the Proposition C bonds reflects the weaker leverage constraint of 1.30 times on the Proposition C lien compared to an effective Additional Bonds Test (ABT) of 2.46 times for Proposition A bonds and 2.50 times for Measure R bonds,” Moody’s said. “The 1.30 times ABT is relatively weak compared to other highly rated mass transit sales tax bonds.” Moody’s added that the rating consideration included “the cumulative 18% decline in pledged revenues between fiscal years 2008 and 2010.” Moody’s gave the downgraded bonds a stable outlook to reflect “our expectations of continuation of recovery in retail sales within Los Angeles County.” The rating affirmation on the Proposition A and Measure R bonds “reflects their strong ABTs, the sizeable and well-diversified tax base of Los Angeles County, a first lien on tax revenues remit directly to the trustee by the California Board of Equalization on a monthly basis and the essentiality of the transit system.”
(July 7, 2011) -- Tax-exempt bonds backed by private nonprofit Woodbury University have been downgraded to below investment grade by Standard & Poor’s. The rating is now BB+, down one notch from BBB-minus. The rating change reflects “the continued decline in the university’s financial resources,” S&P said. However, the rating outlook is stable because of “our anticipation that the university will maintain positive operations and increase its financial resources over time,” the rating agency added. The downgrade affects 2005 bonds issued through the California Educational Facilities Authority; about $18.6 million of the issue remains outstanding. Woodbury University opened its doors in 1884 in Los Angeles and is now based in Burbank.
(July 3, 2011) -- The City of Hercules has been among a few troubled issuers receiving attention for serious budget problems. We previously discussed a consultant’s recommendations that stressed the importance of making redevelopment debt payments. The city in the last week of June did in fact pass a new budget for fiscal 2012, which began on July 1, and debt service payments are covered. The Hercules Redevelopment Agency had faced a $1.86 million gap in the new fiscal year, reflecting large annual debt service payments and certain settlement costs. In addition, assessed values have fallen by almost 25% in the last three years, reducing redevelopment revenue. Hercules decided to close the fiscal 2012 gap with one-time money. The sale of Yellow Freight property, which is expected to close this summer, will close a majority of that gap. The balance will come from a one-time transfer from a Fiscal Neutrality Fund that received developer impact fees. City staffers noted, however, that the redevelopment agency faces recurring deficits that aren’t solved by this one-time fix. “Therefore, it is staff’s position that over the next six months, the Agency should work to reduce this structural deficit which would include seeking outside assistance from bond counsel and financial advisors,” an agenda item said. Hercules also faced a huge $5 million gap in the city’s general fund budget for fiscal 2012. The final budget reflected “shock treatment” needed to close most of the gap, the city’s agenda said. Among other things, Hercules cut its work force by more than 30% and negotiated employee concessions. The steps brought spending into line with estimated revenue of $15 million in fiscal 2012. In contrast, Hercules expenditures totaled $20.8 million in fiscal 2010 and an estimated $18 million in the fiscal year that just ended June 30. Even with various cuts, Hercules’ general fund was left with a gap of $858,000 that was also closed with a one-time transfer from the Fiscal Neutrality Fund. The city isn’t out of the woods by any means, especially given its redevelopment agency’s problems. But at least it has bought some time with a fiscal 2012 budget that works.
(July 1, 2011) -- For a change, we can mention a multi-notch upgrade. The City of Oakland’s 2004 sewer revenue bonds have been upgraded to AA-minus from A-minus, a three-notch improvement, by Standard & Poor’s. “In part, the upgrade reflects our view of strong debt service coverage, a demonstrated history of rate increases, and strong liquidity position,” S&P said. About $53 million of bonds are affected by the rating change. Oakland’s unemployment rate is higher than either the state’s or the nation’s, S&P noted. Still, the stable outlook on the bonds “reflects our expectation that the stable nature of the [sewer] system’s revenue and expense base will continue to support strong” debt service coverage.
(June 30, 2011) -- On June 14 on our General News page we noted that the City of Chowchilla had been presented with a proposed budget for fiscal 2012 that is “structurally balanced.” We also noted that we were assuming Chowchilla would resume making payments on its 2005 lease revenue bonds (Civic Center Project). Chowchilla drained the reserve fund to cover debt payments on these bonds last July and January. Chowchilla’s City Council this week approved the fiscal 2012 budget and the city is in fact resuming payments on the lease revenue bonds and also replenishing the reserve fund (to the tune of $367,000).
(June 29, 2011) -- Moody’s Investors Service downgraded City of Stockton bonds by two notches, citing continuing budget problems while noting the city’s resolve to address them. Stockton’s issuer credit rating, a proxy of sorts for a general obligation grade, dropped to A3 from A1. Stockton’s 2006A lease revenue refunding bonds fell to Baa2 from A3 and its taxable pension obligation bonds to Baa1 from A2. “The city estimates that its general fund will end this year with no fund balance on a budget basis,” Moody’s said in a report. “In addition, the city needs to make dramatic cuts in fiscal 2012 in order to avoid an operating deficit. It has the resolve and the tools to do so, but the city is very vulnerable to unanticipated revenue declines or expenditure increases. The city’s precarious financial position is the key factor in both the downgrade and the negative outlook on the city's ratings.” While the weak economy has hit the Stockton area particularly hard, driving housing prices lower, remaining strengths include a large tax base and “staff and council committed to achieving structural balance,” Moody’s said. The Bond Advisor should add that stories occasionally resurface that put Stockton and “bankruptcy” in the same sentence, even though various city officials have said that isn’t an option for dealing with large budget gaps. Stockton seems committed to making tough decisions and, as we always note, bankruptcy isn’t a “solution.”
(June 29, 2011) -- San Juan Capistrano certificates of participation for the city’s water system were downgraded three notches, to A from AA, by Standard & Poor’s. As previously noted, a groundwater recovery plant has been operating below capacity and the city also had to make improvements to deal with certain contamination issues. In response, the city had to rely on added imports of higher-cost water. These issues caused “deteriorating financial performance” and necessitated borrowing from other city funds, S&P said. San Juan Capistrano expects the plant to be operating at full capacity in fiscal 2012, S&P said, and in 2010 the city raised rates “substantially.” The current single-A rating “reflects our expectation that the water system’s financial performance will improve in fiscal 2011 due to the 2010 rate increases, and that ground water production will increase starting in fiscal 2012 once improvements to the ground water recovery plan are brought online,” S&P said.
(June 28, 2011) -- Two merged project area tax allocation bond issues backed by the Desert Hot Springs Redevelopment Agency are now rated B after a three-notch downgrade from BB by Standard & Poor’s. An additional assessed valuation (A.V.) decline in fiscal 2011 prompted the downgrade for Series 2006 and 2008 bonds, following a sharp A.V. drop the year before, S&P said. There is an “anticipated shortfall in revenue for debt service after fiscal 2014, even after including recent debt restructuring and agency-identified unpledged revenue,” S&P explained. However, the outlook is “stable” because further A.V. declines should be “less significant.” It also helps that there is a cash-funded debt service reserve. This reserve “provides some liquidity for the agency to manage potential pledged tax increment revenue shortfalls for several years beyond 2014,” S&P said.
(June 23, 2011) -- Still don’t believe it is an issuer’s market, at least for higher-rated deals? Well, sensitive investors need to stay away from the yield scales for this week’s $47 million bond pricing by the Contra Costa Water District. The yields will make them weep. A five-year water revenue bond (rated Aa2 and AA+) yielded 1.40% and a 10-year, 2.90%. The 14-year maturity yielded 3.62%. Those yields are so low, insensitive investors and hardened bond traders probably are shedding some tears as well.
(June 21, 2011) -- While we don’t mention one-notch upgrades or downgrades very often, it didn’t escape our attention at the end of last week when Sacramento County certificates of participation and pension obligation bonds fell to BBB+ from A-minus after a Standard & Poor’s downgrade. The county’s issuer credit rating dropped a notch to A-minus. A decrease in general fund reserves to deal with deficits drove the downgrade. “In addition, the county’sefforts to balance its operations have been offset by labor cost increases and the uncertainty of state funding, which the county has little, if any, control over,” S&P said in a report. “The stable outlook reflects our view that the county has made significant reductions to its budget and has a balanced budget for fiscal 2012. Also adding stability to the rating are labor union agreements that call for no salary increases for the next two years for the majority of county employees.” This is another example of the problems public unions are causing for sound public finance operations, along with the unwillingness of elected leaders to confront this issue.
(June 16, 2011) -- We often mention “essential-purpose” or “essential-service” bonds as an appropriate purchase for diversification, especially for investors with a conservative bent. This week’s bond sale by the Los Angeles Department of Water and Power fits that category. We also make the point from time to time that some bonds can be for an “essential” service but also of lower quality, depending on the area they serve. A good example this week shows what we mean. Fitch Ratings has downgraded Sanger Public Financing Authority wastewater treatment lease revenue refunding bonds (Series 2006A) to BBB from BBB+. The rating outlook changed to “negative” from “stable.” Fitch noted that the Sanger sewer enterprise provides an essential service to a population of about 25,500 people in an agricultural community about 15 miles east of Fresno. Nevertheless, the downgrade occurred because of Sanger’s “ failure to enact rates that would materially improve debt service coverage and allow for ongoing maintenance and investment in the sewer system,” Fitch noted. “The system appears to have little rate-raising flexibility due to political and economic constraints.” Indeed, while staffers recommended a sizeable sewer rate increase, elected policymakers rejected it, Fitch added. One of the problems involves Sanger’s “limited economic base that is suffering a very deep downturn,” Fitch said. A housing boom helped the city during the last decade, but the market downturn also hit Sanger particularly hard. The bonds also are backed by a secondary pledge from the city’s general fund. This general fund pledge “does not give meaningful support to the credit rating” at this point because the city has struggled with recent deficits, Fitch said. Another downgrade for the sewer debt is possible unless the city takes steps to improve the financial cushion for the bonds. The Sanger bonds do provide an interesting yield opportunity for investors who believe the debt will muddle through without a default. The 30-year bond when initially sold (due in 2036) yielded a tax-exempt 4.375%. That same bond, now due in 25 years, has traded at yields above 7% (with prices in the 60s). The bonds were sold with triple-A ratings based on Ambac bond insurance; that guarantor subsequently imploded over riskier securities it backed outside the municipal market. The guarantee still might have some value because a Wisconsin regulator segregated the public finance exposure from riskier securities.
(June 14, 2011) -- Oakley Redevelopment Agency 2008 subordinate-lien tax allocation bonds were dropped three notches by Fitch Ratings, to BB from BBB. That is Fitch’s second downgrade in about a month on these bonds; they were A-minus before a May rating cut. (Keep your bonds straight; senior-lien 2003 TABs were affirmed at single-A because of solid financial cushions.) The latest downgrade “reflects the [subordinate] bonds’ inadequate debt service coverage levels resulting from a substantial three year assessed valuation (AV) contraction and escalating debt service that will lower coverage to below one times without AV growth,” Fitch said. Oakley’s redevelopment agency is willing to use non-pledged resources to cover debt service on the subordinate bonds as needed, which could help avoid tapping the reserve fund in future years. However, Fitch expressed concern about the governor’s proposal to eliminate redevelopment agencies; the plan, which is still bottled up in the legislature, could strip the Oakley agency of non-pledged resources it is willing to use for debt service. Oakley is located between San Francisco and Sacramento. Standard & Poor’s previously cut Oakley’s subordinate TABs to BB+ as a result of the project area’s large assessed value declines over the last three years. Debt-service coverage will remain “thin” for several years, S&P said.
(June 13, 2011) -- Even bankrupt cities get little victories. Vallejo’s “underlying” rating on its 1999 certificates of participation now has a “stable” outlook instead of a “negative” outlook from Standard & Poor’s. Of course, the underlying rating is still single-C. “The city previously indicated to us it would deplete the surety reserve fund in full for its July 2011 debt service payment,” S&P said. “However, given the newly replenished debt service policy, we understand payments will be made from city payments and the surety rather than tapping the insurance policy. The stable outlook reflects Standard & Poor's opinion that the city will make only partial debt service payments but that the newly replenished debt service surety policy will likely be sufficient to cover debt service payments until the city takes over full payments again.” National Public Finance Guarantee Corp. provides the surety policy and also insures the COPs. The certificates are rated triple-B based on the NPFG backing and investors can focus on the fact they get paid in full and on time.
(June 9, 2011) -- The verdict is in from Moody’s Investors Service after bondholders approved covenant changes to relieve pressure on San Joaquin Hills Transportation Corridor Agency toll road revenue bonds. Moody’s downgraded the bonds by two notches, to B1 from Ba2, leaving them four notches below investment-grade. In May bondholders approved a toll road agency proposal for covenant changes designed to help avoid a potential default. The toll road agency asked bondholders to reduce the debt service coverage ratio from 1.3 times to 1.0 times. In addition, holders of the 1997 convertible capital appreciation bonds maturing in 2018, 2020, 2022, 2023 and 2024 were asked to extend maturity dates. “In Moody’s opinion, these changes constitute a weaker security package for bondholders that is inconsistent with the Ba2 rating and more in line with a B1 rating,” a report said. “The indenture amendments enable the agency to meet the restated rate covenant. They do this however by, in Moody's opinion, weakening the rate covenant and back-loading debt. Overall future debt service costs increase from a total of $4.14 billion pre-restructuring to nearly $5 billion post restructuring.” The outlook remains “negative,“ reflecting “lingering uncertainty about the fundamental performance of the toll road, uncertain pace of economic recovery in the service area given continued weak national economic indicators, and the agency’s ability to increase already high toll rates in the event of slow traffic growth. Current toll rates are among the highest in the U.S. at approximately 32 cents per mile.” The Bond Advisor has previously noted that the already low credit rating isn’t the main issue. The main issue is having the agency find a way to pay off all its bonds in full (and pay off most of them on the scheduled maturity dates, except for those being asked to provide the flexibility). Obviously the toll road’s performance going forward remains an important factor in whether the restructuring accomplishes this goal.
(June 8, 2011) -- Due to other matters on our plate, we didn’t mention the other day that California Housing Finance Agency home mortgage revenue bonds were cut to Baa1 from A3 by Moody’s Investors Service. It wasn’t a surprise because of past rating agency warnings about Genworth Mortgage Insurance Corp., which provides reinsurance on about 41% of the housing agency’s home mortgage bonds outstanding. Moody’s recently cut Genworth’s rating to Ba1 from Baa2. “The rating remains on review for potential downgrade pending further assessment of the level of support attributable to the reinsurance from GEMICO, which is a key factor in determining the level of potential losses and HMRB’s ability to absorb those losses,” Moody’s said. “We will consider the reinsurance as well as the other key factors driving the rating, including the ongoing level of delinquencies and foreclosures in the mortgage portfolio, the impact of high levels of variable rate debt,” and other factors, Moody’s said. The rating could be affirmed but another downgrade, even of more than one notch, is possible, Moody’s added. The downgrade affected $5.7 billion of bonds. Moody’s cited “over- collateralization and profitability as important measures of the ability of program to withstand the impact of mortgage losses as well as potential effects on changing interest rate markets on variable rate debt. The program entered the period of mortgage crisis with a strong financial base; however, mortgage origination came to a virtual halt at the end of 2008 as markets stalled and delinquencies began to rise, beginning a period of contraction of the program.”
(June 4, 2011) -- We expect that a lot of people have at least heard of Eli Broad because of his extensive philanthropic work. He also is known for the Kaufman and Broad homebuilding company (now KB Home) and for building up the SunAmerica insurance company before selling it more than a decade ago. Now municipal bond buyers can sort of tap into Broad’s wealth by purchasing tax-exempt debt tied to one of his projects. The California Infrastructure and Economic Development Bank plans to sell $150 million of tax-exempt bonds to help finance The Broad museum in downtown Los Angeles. Moody’s Investors Service has rated the bonds Aa1, one notch below triple-A, based on pledge agreements between The Eli and Edythe Broad Foundation, The Broad Art Foundation, and The Broad Collection. The Broad Collection will own and operate the contemporary art museum, which is expected to open in 2013. Moody’s cited several reasons for the high rating, including “The Broad Foundations’ large unrestricted balance sheet with $1.56 billion of unrestricted resources.” Another factor is the legal structure of a pledge agreement “irrevocably and unconditionally requiring The Broad Foundations to make contributions sufficient to enable [The Broad Collection] to make semi-annual debt service payments through maturity of the bonds in 2021,” Moody’s noted. Another pledge agreement requires The Broad Foundations to make contributions “sufficient to enable [The Broad Collection] to cover its expected operating expenses for ten years.” Moody‘s also noted “$435 million of unrestricted monthly liquidity providing good support of operations and funds available for debt service.”
(June 1, 2011) -- On May 25 we noted below that the Mendocino-Lake Community College District received a boost to A+ from Standard & Poor’s. The previous single-A rating had been withdrawn for a short time on the Mendocino-Lake Community College District’s 2007 general obligation bonds after S&P cited a lack of “adequate timely information required to maintain the rating.” The district plans to sell $37.5 million of new G.O. bonds in June. Now Moody’s Investors Service also has changed its rating, but downward. The college district’s G.O. bonds were lowered to Aa3 from Aa2. Even at the new level, that is a notch higher than S&P’s grade. Moody’s commended the district for generating surpluses in most recent years, despite state cutbacks, by carefully managing spending. “The district has been able to maintain sound fund balances even during the recent, difficult budget years, Moody’s said. Even so, “the district’s narrow liquidity is a notable credit weakness” and prompted the downgrade, Moody’s said. “The district showed no cash in its unrestricted general fund at fiscal year end 2010. This is perhaps not surprising given that the state accounts for about 65% of district’s revenues, and the state has deferred school district funding in recent years.” In addition, Moody’s noted that the district has ready access to low-cost loans from the county treasurer and hasn’t needed note sales to address its cash flow needs. “Still, the district’s reliance upon a third-party for its liquidity is a distinct credit negative,” Moody’s said. The college district serves a large part of Mendocino County and neighboring Lake County. The area includes communities such as Lakeport, Ukiah, and Willits.
(May 31, 2011) -- A handful of new municipal bond issues on the horizon are worth flagging, even if they aren’t all expected this week. The Santa Clara Unified School District, at its May 12 board meeting, authorized selling $91 million general obligation bonds from a 2004 voter election. The district also approved offering $81 million of G.O. bonds from a 2010 voter authorization. Standard & Poor’s rates these bonds AA, with a “negative” outlook. The Imperial Irrigation District, at its May 17 board meeting, approved selling up to $85 million of electric system refunding bonds. Proceeds will refund certain revenue commercial paper warrants tied to the El Centro Unit 3 Repower Project, which is expected to add 100 megawatts of generation capacity. Goldman, Sachs & Co. and Citi are the lead underwriters. S&P rates the electric system bonds AA-minus. At the smaller end of the new-issue market, the St. Helena Unified School District plans to sell $9 million of tax-exempt G.O. bonds. The deal, which might price this week, is noteworthy because S&P grades the bonds AA+, or one notch below triple-A.
(May 26, 2011) -- We usually don’t highlight one-notch rating changes in either direction, but on occasion why not mention an upgrade? Standard & Poor’s upgraded the City of Oxnard ahead of a planned $24 million lease-revenue refunding bond sale. The upgrade “reflects our view of the city’s sustained improvement in its financial position, despite revenue declines associated with the recent recession,” S&P said. The outlook is “stable” because “the city’s willingness to adjust its budgets in response to an adverse revenue environment has positioned it to sustain what we consider to be a very strong financial position.” Oxnard’s issuer credit rating rose to AA-minus from A-plus. The city’s lease-revenue bonds rose to A-plus from A.
(May 25, 2011) -- A community college district that plans to sell $37.5 million of general obligation bonds seemed to get quite a boost this week: a four-notch upgrade on its existing debt, to A+ from BBB by Standard & Poor’s. That got our attention, but with a little checking we realized the upgrade wasn’t quite as dramatic. Here is the background. On May 4 the governing board of the Mendocino-Lake Community College District approved the new G.O. bond sale. It also sold such bonds in 2007. In March, however, S&P said it had withdrawn its single-A “underlying” rating on the 2007 bonds “due to a lack of what we consider to be adequate timely information required to maintain the rating.” (The underlying rating reflects an issuer’s own credit strength, absent a financial guarantee.) Once the underlying rating was withdrawn, Standard & Poor’s also lowered its long-term rating to BBB from A on the 2007 bonds to reflect the insurance policy on this series issued by National Public Finance Guarantee Corp. If a bond issue has both an underlying and insured rating, S&P uses the higher one for grading purposes. It used to be the insurance rating was higher when the guarantors were triple-A, but that isn’t always the case on some older deals. So that is the background. Apparently the college district satisfied S&P’s concern over the “timely information” as it prepared for the new bond sale. It seems to have received a one-notch upgrade since the new “underlying” rating is now A+, not single-A. The rating reflects “the district’s good financial management practices and low overall debt burden,” S&P said. The college district serves a large part of Mendocino County and neighboring Lake County. The area includes communities such as Lakeport, Ukiah, and Willits.
(May 23, 2011) -- In our weekly summary on Friday we forgot to mention the results from the Foothill-De Anza Community College District sale of $184 million G.O. bonds. We set the deal aside because it was packed into two longer maturities. It is worth mentioning because Moody’s Investors Service rates the bonds Aaa. Standard & Poor’s rates the deal two notches lower at AA. The 2036 maturity yielded a tax-exempt 4.73% and the 2040 maturity, 4.78%. On Friday the Magnolia School District priced a much smaller sale of $6 million G.O. bonds (rated Aa3 by Moody’s). The longest maturity in that sale, 2031, yielded a tax-exempt 5.00%.
(May 18, 2011) -- The Metropolitan Water District of Southern California lost its triple-A grade from Fitch Ratings on $4.4 billion of water revenue and water revenue refunding bonds. “The downgrade of Metropolitan’s long-term rating reflects its lingering lower financial performance since 2006, albeit still strong, and an evolving water supply and demand environment in the service area,” Fitch said. “While financial performance may reach an exceptionally low level in fiscal 2011, Fitch expects Metropolitan to achieve the improved financial performance it has projected for fiscal 2012.” Future financial performance will provide “levels that are still strong and provide significant bondholder protection, as indicated by the AA+ rating,” Fitch added. The Bond Advisor should note that bonds of the Metropolitan Water District have been, still are, and will continue to be an important source of diversification for investors wanting a “safe” name in their portfolio. This is one of those ultimate “essential-service” providers. MWD provides roughly half of Southern California’s water supply, covering six counties with 19 million residents. Standard & Poor’s rates such revenue bonds AAA and Moody’s Investors Service, Aa1.
(May 17, 2011) -- Ratings and underlying ratings on California Housing Finance Agency bonds issued under its home mortgage revenue bond (HMRB) indenture were cut to BBB from A by Standard & Poor’s. (By the way, keep your bonds straight. The housing agency has various bonds outstanding with assorted security and ratings. For example, S&P has an underlying rating of A-minus on its general obligation bonds.) California’s weak housing market is one factor behind the downgrade. The finance agency also faces challenges resulting from ‘the significant use of variable-rate debt and swaps,” S&P said. A loan portfolio also is considered by S&P to “be of moderate to high risk,” with 42% of the loans insured through a reinsurance contract with Genworth Mortgage Insurance Corp. (rated BB+ with a negative outlook). These factors “are partially offset by our opinion of consolidated cash flows that demonstrate sufficient assets and revenues to absorb projected loan losses without reliance on cash contributions by CalHFA from other funding sources,” S&P said. “In addition, participation in the U.S. Treasury’s Temporary Credit and Liquidity Program has allowed to the agency to refinance some of its high interest and variable-rate debt.”
(May 12, 2011) -- One of the stronger community college districts in California plans soon to sell triple-A general obligation bonds. The Foothill-De Anza Community College District, at a May 2 Board of Trustees meeting, approved selling up to $190 million G.O. bonds. Moody’s Investors Service rates the bonds Aaa. This is one notch higher than the Aa1 Marin Community College District G.O. bonds we mentioned in the item below. We anticipate the Foothill-De Anza bonds will be priced this month. Morgan Stanley & Co. is the fortunate underwriter that gets to handle the bonds; it won’t have trouble finding plenty of demand for a high-quality deal. The district serves about 105 square miles in Santa Clara County, including cities such as San Jose, Cupertino, Los Altos, Sunnyvale, and Mountain View. The large, wealthy, and diverse tax base is one credit positive. “The district’s assessed value is unusually large even among California community college district’s at $96.9 billion in fiscal 2011, down just 1.0% from the prior year,” Moody’s noted in a report.
(May 11, 2011) -- Investors looking for higher-rated new bond issues will see an offering one week from today by the Marin Community College District. The district plans to take bids from underwriters on May 18 for $53 million of general obligation bonds. Moody’s Investors Service rates the bonds Aa1, one notch below triple-A. Standard & Poor’s rates them AA. The college district will no doubt be heartened by the City of Arcadia’s rates, as our Research story on May 11 explains. Investors looking for a lower-rated obligation can peek at the Madera County Board of Education certificates of participation, rated A-minus. Bids from underwriters will be taken tomorrow (May 12). The Los Angeles County Community Development Properties is circulating a preliminary official statement for $43 million of lease-revenue bonds. They are rated Aa3. Proceeds will finance a community development commission office building and parking facility.
(May 10, 2011) -- Standard & Poor’s lowered its “underlying” credit rating on City of Compton lease-revenue bonds by three notches, to BBB-minus from A-minus, because of a recent pattern of deficit spending. Deficits from fiscal 2008 to 2010 were about 20% of the budget for each year, S&P said. City officials are discussing budget cuts but haven’t identified or approved specific action yet, the rating agency added, one reason the rating outlook is negative. “Should the city’s cash position deteriorate or should the city not make a clear plan to restore structural balance, we could lower the rating further within the outlook's two-year horizon,” S&P said. The chronic deficits have undercut Compton’s “previously strong unreserved general fund balance position,” Standard & Poor’s said. “In addition, management believes it will likely take several years of cuts to reach a positive fund balance.” Compton sold lease revenue bonds in 2008 that were insured by Ambac. Budget pressures are affecting other cities as well, and yesterday Modesto’s lease-revenue bonds were downgraded one notch by Fitch Ratings to A+ from AA-minus. The downgrade on $64 million lease-revenue bonds issued through a public financing authority “reflects substantial economic and tax base weakening caused by a three-year tax base contraction, high unemployment, and a distressed housing market.” Modesto has an “otherwise sound financial profile,” Fitch said. Still, “observance of management’s $7 million unreserved general fund balance policy will be key to maintaining the city’s current rating level, which may require additional expenditure reductions if revenues remain recessed or fall further from current levels.”
(May 9, 2011) -- The City of Bell, most famous now for the exorbitant salaries paid in the past to certain city officials, is doing a massive house cleaning. New members on Bell’s City Council are turning the city upside-down to fix past wrongs and give Bell a fresh start. At this week’s City Council meeting, staffers recommend that the governing board address a handful of issues affecting outstanding bonds. Despite Bell’s numerous problems, the city is keeping up on payments on its tax-exempt debt. (A taxable lease-revenue bond held by an investor in Europe is another matter, and we will discuss that in a moment.) Pedro Carrillo, the interim chief administrative officer, said in a memorandum to the council that Bell has seven outstanding bond issues. The memo is included in the city council’s May 11 meeting agenda. “Established revenues” provide a revenue stream to cover payments on five of the existing bonds, Carrillo said. A utility users’ tax is dedicated to paying 1998 certificates of participation; tax-increment revenue pays a 2003 redevelopment bond; rental revenue from mobile-home parks pay debt service on a 2005 lease-revenue bond; a pension-tax levy covers payments on a 2005 taxable pension obligation bond, and property-tax revenue pays for a 2004 general obligation bond. Bell also is up-to-date on payments for a 2007 general obligation bond. However, the 2007 G.O. bond is not fully funded “because the tax levy has not been fully assessed,” Carrillo’s memo said. The current-year tax levy rate fully covers the 2004 G.O. bonds and 20% of the 2007 G.O. bonds, Carrillo said. As a result, staffers are recommending that the City Council “considers, reviews, and authorizes an action to resolve the unfunded status” of the general obligation bond. Principal payments on the 2007 issue will start to come due in 2012. The Bond Advisor expects that Bell will fix this issue. In addition, we note that several Bell bonds include backing from financial guarantees. For example, the 2007 G.O. bond was initially insured by CIFG; that insurer has been replaced by Assured Guaranty Municipal, the strongest player still standing among the former triple-A insurers. The only debt Bell hasn’t met its obligation on is a $35 million taxable lease-revenue bond issued through its public finance authority. This privately-placed bond was bought by Belgium bank Dexia and the city is negotiating with the bank to find a solution, Carrillo said.
(May 4, 2011) -- Moody’s Investors Service said it might downgrade $28 billion of Puerto Rico bonds, citing the “deeply underfunded nature” of the commonwealth’s retirement system as a big culprit. Puerto Rico bonds are held by residents across the U.S., including in California, because interest earned is exempt from state and federal income tax. After a municipal bond ratings“ recalibration” last year, Moody’s boosted Puerto Rico general obligation bonds out of triple-B territory and up to A3. The “recalibration” reflected a view that many municipal bonds had been underrated relative to their lower default risk. Fitch Ratings grades Puerto Rico G.O. debt at BBB-plus and Standard & Poor’s at BBB, and the debt tends to trade at a triple-B level already. Any rating change by Moody’s would affect various bonds, not just G.O. debt. “The Commonwealth’s pension plans are far weaker financially when compared to the pension plans of the 50 U.S. States, with a combined total funded ratio of 13.5%,” Moody’s said. Gov. Luis Fortuño, who deserves credit for trying to tame Puerto Rico’s chronic deficit spending, also recently started to tackle the underfunded retirement system. Nevertheless, the pension system “will exert significant budgetary pressure for many years to come,” Moody’s said. “The A3 rating reflects the commonwealth’s weak economy, which has been in recession since 2006; the budgetary structural imbalance, brought on by years of overestimating revenues, underestimating expenses, and making up the difference with one-time revenues and deficit borrowing; the actions taken in the past two years to dramatically reduce that structural imbalance, largely through cost reduction; and the proactive steps the administration has taken to stabilize the economy and the finances of the island.” Any rating change, if it occurs, might be one or more notches, Moody’s said.
(May 3, 2011) -- San Juan Capistrano certificates of participation with a first lien on the city’s net water system revenues have been downgraded three notches, to A from AA, by Fitch Ratings. The downgrade “reflects a dramatic weakening of the city of San Juan Capistrano’s financial profile including the depletion of unrestricted cash reserves, costly and delayed remediation of water contamination, and insufficient net system revenues to meet annual debt service requirements,” Fitch said in a report. However, the rating is still single-A with a stable outlook because of other supporting factors, Fitch added. That is “because debt service coverage is projected to improve with approved rate hikes, reduced operating expenses from decreased imported water purchases, and a receipt of the first installment of a disbursement pursuant to a settlement agreement related to water contamination.” A March 7, 2011 settlement with Chevron Corp. will generate some funds over the contamination issue. A city groundwater recovery plant constructed to reduce San Juan Capistrano’s reliance on imported water has operated at half capacity the last couple years because of wet weather and the contamination issue, Fitch said. The housing collapse also compounded problems with water system revenue, Fitch added.
(May 2, 2011) -- A week after Standard & Poor’s issued a similar warning, Moody’s Investors Service said it might downgrade San Joaquin Hills Transportation Corridor Agency toll road revenue bonds. Moody’s rates the bonds Ba2, two notches below investment-grade. S&P currently rates the bonds BB-minus. In April the toll road agency asked bondholders to approve covenant changes designed to help avoid a potential default. The toll road agency asked bondholders to reduce the debt service coverage ratio from 1.3 times to 1.0 times. In addition, holders of the 1997 convertible capital appreciation bonds maturing in 2018, 2020, 2022, 2023 and 2024 were asked to extend maturity dates without changing the current interest rates they receive. “The restructuring would extend original debt maturities on certain [convertible capital appreciation bonds] by 18-19 years and also would subordinate a portion of certain interest payments on the restructured bonds,” Moody’s noted in a comment. “In Moody’s view these amendments would constitute a weaker security package for bondholders.” The Bond Advisor repeats what we said below on April 25: “At this point the already low credit rating isn’t the main issue. The main issue is having the agency find a way to pay off all its bonds in full (and pay off most of them on the scheduled maturity dates, except for those being asked to provide the flexibility).”
(April 28, 2011) -- The Orange County Performing Arts Center, which does business as the Segerstrom Center for the Arts, is one example of many in the municipal market of the risks of relying on variable-rate bonds. In past years, even when tax-exempt fixed rates were at low levels not seen since the 1960s, many issuers still found it advantageous to sell variable-rate bonds. That worked fine as long as the short-term market functioned “normally,” but then the credit crisis came along and brought the party to a halt. The Arts Center had relied in 2004 and 2007 on auction-rate debt backed by bond insurer FGIC. When the auction-rate market froze, and FGIC was downgraded, interest-rate resets rose to as high as 7.5% on some of the 2004 and 2007 bonds, according to a report by California Infrastructure and Economic Development Bank. The Arts Center in 2008 then sold variable-rate debt backed by letters of credit to refund the older bonds. As soon as next week, the Arts Center through the infrastructure bank plans to price $57 million of fixed-rate tax-exempt bonds to refund its 2008C debt. Allied Irish Banks, p.l.c., provided the letter of credit on the 2008C bonds, and that banker recently had its credit rating lowered to BB by Standard & Poor’s. That downgrade in turn raised the cost of the variable-rate bonds. The Arts Center expects to save $15,000 to $60,000 in debt-service costs each month by refunding the 2008C bonds, the infrastructure bank report said. The upcoming bond sale is rated single-A by Standard & Poor’s. The nonprofit Arts Center operates at a deficit and relies on donor contributions to meet its expenses, according the preliminary official statement. That isn’t a surprise for these sort of cultural institutions; obviously this is a “non-essential” type of bond in the bigger municipal market picture. On the plus side, the Arts Center had $243 million of net assets as of June 30, 2010, the bond prospectus said. About $105 million of this involves liquid unrestricted assets available to make loan payments, the infrastructure bank report said. Such assets help support investment-grade credit ratings for this type of nonprofit issuer. The Art Center’s deficit in fiscal 2010 (expenses over revenue) was about $17.5 million, according to its financial statement. However, it also took in $11.4 million of contributions and generated $10.4 million of income from its endowment and other investment income.
(April 25, 2011) -- Standard & Poor’s late Friday put San Joaquin Hills Transportation Corridor Agency toll road revenue bonds on CreditWatch with negative implications after the agency asked bondholders to approve covenant changes designed to help avoid a potential default. S&P currently rates the bonds BB-minus. The toll road agency asked bondholders to reduce the debt service coverage ratio from 1.3 times to 1.0 times. In addition, holders of the 1997 convertible capital appreciation bonds maturing in 2018, 2020, 2022, 2023 and 2024 were asked to extend maturity dates without changing the current interest rates they receive. Last week we read the 58-page document the toll road agency sent out regarding this proposal. The basic idea behind the plan is to save about a half-billion dollars in debt service costs from fiscal 2012 to 2024 so the toll road agency can stay current on all its 1993 and 1997 bonds. The market has long known that something would have to be done because toll road revenue never met past forecasts. Other attempts to deal with problem, such as a merger with the stronger Foothill/Eastern toll road, never moved forward. “Standard & Poor's expected the agency to review options to increase its financial flexibility,” the rating agency said late Friday. “The actions taken by the agency have both positive and negative aspects. The CreditWatch listing reflects our view that these actions could potentially weaken the credit. Standard & Poor's expects to resolve the CreditWatch within the next 90 days, during which time we will determine the rating impact, if any, from the proposed indenture changes and the restructured debt.” National Public Finance Guarantee Corp. (the MBIA unit that holds MBIA’s past public finance exposure) also must approve the changes because it insures some of the toll road bonds. The agreement on these changes could be put in place within a matter of weeks. Our view is that the toll road agency probably got a sense from major bondholders that they would support these changes. At this point the already low credit rating isn’t the main issue. The main issue is having the agency find a way to pay off all its bonds in full (and pay off most of them on the scheduled maturity dates, except for those being asked to provide the flexibility).
(April 22, 2011) -- A few days ago we noted that Anaheim had approved moving forward on an electric system revenue bond sale of at least $90 million for Anaheim Public Utilities. The bonds could price during the week of April 25, making it the largest deal on tap in coming days. An Anaheim financing authority will issue the bonds, which are rated AA-minus by both S&P and Fitch Ratings and A1 by Moody’s. The Community Hospital of the Monterey Peninsula (A+) has a tax-exempt sale of about $30 million ready to go, with a pricing possible in coming days. The California Statewide Communities Development Authority will issue those health facility revenue bonds. The Tracy Joint Unified School District next week is selling a small issue ($6 million) of general obligation bonds with Aa2 ratings. The Roseville Joint Union High School District (A+) plans to price $5 million of G.O. bonds.
(April 21, 2011) -- Standard & Poor’s this week downgraded Hercules Redevelopment Agency Series 2007A and Series 2005 tax allocation bonds (merged project area) to CCC from BB. Three years of “significant drops in assessed value” in the project area backing these bonds is one factor for the low rating, S&P said. “The negative outlook reflects what we view as the agency’s overspending, which has led to negative cash balances, and our expectation that pledged revenue will be insufficient to cover nonhousing debt service obligations after recent significant [assessed valuation] declines in the project area.” (By the way, the 2005 and 2007A bonds are insured by Ambac, which is still a possible back-up for any near-term default after a Wisconsin regulator stepped in to “segregate” Ambac’s riskier exposure from its safer muni bond portfolio.) In late March Municipal Resources Group, an outside adviser, gave the City of Hercules options for fixing several financial problems. In regard to the redevelopment agency, MRG said the city should “focus all resources on meeting debt service first.” Keep your bonds straight. Hercules also has redevelopment bonds backed by housing set-aside money and S&P affirmed the underlying BBB-minus rating on those bonds this week (albeit with a “negative” outlook).
(April 21, 2011) -- City of Oakdale sewer enterprise revenue bonds have been downgraded two notches, to A3 from A1, because of weaker financial performance. Moody’s Investors Service added that there is “uncertainty resulting from the absence to date of a fiscal 2010 audited annual financial report for the city and its sewer enterprise.” The $1.7 million of bonds affected by this action remain on “watch” for another downgrade pending receipt of the audited financials, Moody’s said. There also are positive factors to consider, the rating agency added. “The current rating also reflects the sewer enterprise’s stable, residential customer base within the City and our belief that a substantial rate increase implemented in early fiscal 2010 significantly improved the enterprise’s financial performance in fiscal 2010 and will continue to support healthy financial operations and reserve replenishment going forward.” Debt service coverage “jumped” in fiscal 2010 thanks to the 111% rate increase which took effect in July 2009, Moody’s said. Unaudited fiscal 2010 sewer revenue was expected to provide debt service coverage of 4.28 times, a healthy level. Oakdale is in Stanislaus County, northeast of Modesto.
(April 18, 2011) -- Moody’s Investors Service has joined the other two major rating agencies in downgrading City of San Jose Redevelopment Agency bonds. Moody’s cited “significant deterioration of debt service coverage levels brought about by contraction” of the assessed valuation within the agency's Merged Project Area. The agency’s housing tax allocation bonds continue to fare better and only fell a notch, to A2 from A1. The agency’s non-housing tax allocation bonds were downgraded to Baa1 from A2 if the debt reserve funds were cash-funded or backed by investment-grade surety providers. The non-housing bonds with debt reserve funds backed by non-investment-grade sureties fell to Baa2. The longer-term outlook remains “negative” because the assessed valuation declines probably haven’t bottomed out yet.
(April 18, 2011) -- Certain City of Hercules bonds were downgraded two notches by Standard & Poor’s because of continuing budget pressure. The rating fell to A-minus from A-plus for Hercules Public Financing Authority Series 2010 revenue bonds (electric system project); Series 2003B lease-revenue bonds, and Series 2009 taxable lease-revenue bonds (Bio-Rad Project). The downgrade reflects the city’s “general fund pledge, subject to appropriation, along with a lack of timely budget adjustments to date that have led to declining reserves and liquidity levels,” S&P said. All the ratings are on a CreditWatch for potential downgrade until S&P can assess the city’s plan for dealing with “continued budgetary and liquidity pressures.” The downgrade warning also affects the finance authority’s Series 2010 wastewater revenue bonds, which are still rated A-plus. Hercules already has received plenty of negative publicity thanks to overspending in its redevelopment fund, which will force the city to make tough decisions on how to cover certain tax allocation bond payments.
(April 13, 2011) -- San Francisco’s $2.6 billion of municipal bonds were downgraded one notch by Fitch Ratings because of continuing budget pressure. The city has used most of its discretionary reserves and still faces a structural budget imbalance, Fitch said. Unfunded retiree liabilities of almost $5 billion add to the pressure, Fitch said. San Francisco general obligation bonds fell to AA-minus from AA, along with open-space fund lease bonds. Other lease obligations fell to A+ from AA-minus. The outlook is now “stable,” with Fitch citing “the city’s improving revenue picture due to modest economic recovery as well as to voter-approved tax and fee increases.” The city plans to sell $15.4 million of lease revenue bonds on April 26.
(April 12, 2011) -- If it seems as though we haven’t been doing as many updates the last three weeks or so, it is partly because of a “quiet” municipal bond market. (We also have a very big internal development for us that can’t be discussed here, but will appear in a print edition going out in a handful of days.) Investors looking for a higher-quality bond can watch for the Sequoia Union High School District’s $25 million sale of general obligation bonds. Moody’s Investors Service rates the bonds Aa1, or one notch below triple-A. The district serves several wealthier communities such as Atherton, East Palo Alto, and Belmont. We believe the bonds will price soon through De La Rosa & Co. (the preliminary official statement is available).
(April 7, 2011) -- The Cathedral City Redevelopment Agency is the latest to join the list of downgraded tax allocation bonds thanks to declining assessed valuation. The senior-lien non-housing TABs of the agency were cut to Baa1 from A2 by Moody’s Investors Service, a two-notch decline. “The city is in California’s Inland Empire, one of the areas most heavily impacted by the residential real estate market downturn,” Moody’s noted. Assessed valuation in the affected merged project area fell by 11.9% in fiscal 2010 and 6.7% to $3.6 billion in fiscal 2011. The assessed valuation peaked in fiscal 2009 at $4.4 billion, Moody’s said. The county assessor was “particularly aggressive” in rolling back property valuations to 2001 levels, so the worst should be over for the declines. A smaller drop is still possible in fiscal 2012, Moody’s said, citing a redevelopment agency estimate. An unrestricted reserve of almost $18 million is a positive credit factor.
(April 6, 2011) -- Moody's Investors Service has downgraded non-housing subordinate tax allocation bonds of the Southern California Logistics Airport Authority to B1 from Ba3. That B1 level is four notches below investment-grade. Moody’s cited continuing concern about the ability of the authority to meet debt service at some point on the subordinate bonds unless assessed valuation levels stabilize and increase in upcoming years. Keep your bonds straight. The authority’s taxable housing set-aside revenue bonds were affirmed at Baa3 by Moody’s because of a higher debt-service coverage ratio. The downgraded subordinate bonds are backed by tax increment revenue from all twelve sub-areas of the Victor Valley Economic Development Authority’s project area. “Reasonable assumptions for [assessed valuation] trends in the near term indicate high probability of shortfall in meeting debt service requirements within two or three fiscal years, after exhausting available borrowable resources and debt service reserves,” Moody’s said about the subordinate debt. “The issuer has indicated that in the Fiscal Year 2012, it will continue to be able to meet its debt service requirements with previously collected tax increments and inter-fund loans, mostly consisting of excess increment in the housing fund. Even in the case of no further declines in AV, in the fiscal year 2013, the likelihood of relying on the debt service reserves and depleting them is high, which raises the probability of insufficient funds for debt service in 2014. The debt service reserve for the Series 2007 Bonds is fully funded with cash at the annual debt service level of $2.7 million. The debt service reserve for the Series 2008 bonds is funded at $1.3 million which exceeds the near term annual debt service of $410,000.” As usual, one of the questions down the road will be whether partial draws on the reserve funds could help avert a default long enough to allow assessed valuations time to recover, absent other steps to avoid missed payments.
(April 4, 2011) -- Our Yield Trends weekly update on Friday didn’t include one pricing from the end of the week, the $10 million sale of tax-exempt general obligation bonds by the Millbrae School District. We mention it briefly because a few more school districts plan to sell new bonds this week. While every deal is a little different, investors always like to see recent yields on other new sales. The Millbrae school bonds were rated Aa2 and AA-minus. A five-year bond with a 3% coupon was priced to yield 2.35%. A 10-year bond with a 4% coupon was priced to yield 3.85%. An 18-year bond yielded 5.20%. The 30-year bond yielded 5.70%. Most of the new school issues expected this week are rated just a little bit lower and will probably offer somewhat higher yields, even if they are in the “high” single-A category.
(April 1, 2011) -- Assessed valuation declines continue to be a factor in downgrades of certain redevelopment bonds. The most prominent downgrade this week affected the City of San Jose Redevelopment Agency’s non-housing tax allocation bonds. Standard & Poor’s lowered the rating to BBB+ from A-minus and kept a “negative” outlook on the bonds. The agency has more than $1.5 billion of TABs outstanding. Assessed valuation for the agency has been up and down in recent years, S&P noted, including a 7.5% decline in fiscal 2011. “The negative outlook is based on our opinion of outstanding assessed value under dispute in fiscal 2010 that represents 18.5% of fiscal 2011 incremental assessed value,” S&P said. Taxpayer concentration also remains an issue, with the top 10 taxpayers representing more than a third of incremental assessed valuation in fiscal 2011, S&P said. Fitch Ratings in January downgraded San Jose’s non-housing TABs to BBB- from single-A. Oakley Redevelopment Agency 2008 subordinate-lien tax allocation bonds were dropped four notches by S&P the other day, to BB+ from A-minus. “The rating action reflects our assessment that annual debt service coverage has dropped to below 1x coverage as a result of the project area’s large assessed value declines over the last three years,” S&P said. Debt-service coverage will remain “thin” for several years, even though a required pass-through payment to one entity expires in a year, S&P said. Ambac insured those Oakley bonds. Assessed valuation declines also prompted S&P this week to cut Indio Redevelopment Agency Series 2008A and 2008B subordinate TABs to BBB+ from single-A.
(April 1, 2011) -- Bonds backed by the King/Chavez Academy of Excellence, a San Diego nonprofit overseeing certain charter schools, have been downgraded to BB+ from BBB-minus by Standard & Poor’s. “The rating action reflects our view of a precipitous drop in cash over the last three years, the school’s inability to meet debt service and lease payment coverage from net revenues in fiscal 2010 due to an increase in debt service, and the school’s inability to meet maximum annual debt service coverage through net revenues in any of the last five years,” S&P said. The California Municipal Finance Authority issued the bonds for the nonprofit, which is now known as King-Chavez Public Schools. According to the nonprofit’s history, the “local public schools were abjectly failing” in the areas targeted by the charter-school effort. As a result, its first school was launched a decade ago “in the shadow of the Coronado Bridge.” The 2009 bonds carried interest rates of 8.5% and higher and no doubt were placed with sophisticated investors. A million-dollar trade on the 2039 maturity occurred in January 2011 at a yield of about 7.25%.
(March 30, 2011) -- Sacramento County obligations have been downgraded one notch by Fitch Ratings because of continuing budget problems. The outlook remains “negative,” meaning another downgrade is possible absent corrective action. The county’s 2006, 2007, and 2010 certificates of participation dropped to A from A+. The county’s $883 million of taxable pension obligation bonds also fell to A from A+. The downgrade “is based on the further deterioration of the county’s very limited financial flexibility, including a negative fund balance due to internal borrowing,” Fitch said. The negative outlook “reflects the continued budgetary challenges facing the county as a result of rising retiree costs, flat to declining locally-generated revenues and an uncertain state funding environment.” Sacramento County will face added financial pressure if property assessed valuations continue to decline. Also, “the inability to achieve structural budgetary balance through ongoing expenditure reductions or revenue increases as well as delays in eliminating the county’s negative fund balance would be a significant concern,” Fitch said.
(March 29, 2011) -- A U.S. bankruptcy court judge has approved letting Adventist Health System lease the hospital of the bankrupt Sierra Kings Health Care District. Adventist’s lease, which is being negotiated, is part of a plan to bring the district out of bankruptcy and restore its fiscal health. The judge’s ruling, released last week, notes that the lease with Adventist cannot impair the standing of existing bonds. On March 9 we noted at this link that the health care district’s general obligation bonds were upgraded.
(March 25, 2011) -- Arcata Community Development Agency tax allocation bonds were placed on CreditWatch by Standard & Poor’s with “developing implications.” Since that is a less common CreditWatch action, we decided to mention it. “Developing” means that a rating may be affirmed, raised, or lowered. Most CreditWatch actions we mention are either “positive,” meaning an upgrade is possible, or “negative,” meaning a downgrade is possible. So what is going on with the single-A underlying rating for Arcata TABs? “The rating action reflects the agency’s approach to its tax increment revenue collection limit and its intent to begin depositing all available tax-increment revenue not needed for debt service into an escrow account in order to have sufficient revenue to meet future debt obligations,” S&P explained. The escrow account is important because of a plan limit that caps how much tax-increment revenue the agency is allowed to collect. Without the escrow account in place, the agency “would be in covenant default” and face a downgrade, S&P said. However, it appears “the project area will continue to generate tax increment revenue sufficient to meet future debt service obligations, so long as available revenue is deposited into the escrow account reserved for future debt service payments,” S&P said. Among positive factors, the project area’s tax base is stable and diverse, and there is “strong” maximum annual debt service coverage of 3.57 times, S&P said.
(March 25, 2011) -- Bonds tied to Ontario International Airport were lowered one notch by Standard & Poor’s to A-minus from A. This affects Los Angeles Department of Aviation Series 2006A and 2006B revenue refunding bonds. The outlook is stable. The downgrade “reflects the airport’s rising cost per enplanement, which is largely due to a significant decline in passenger volume since 2008,” S&P said. “In our opinion, the airport's high cost per enplanement is likely to limit (Ontario’s) ability to attract new airlines and rebound from the current downturn in enplanements.” On the plus side, the bonds feature “good debt service coverage,” S&P said. Annual passenger traffic has dropped to 4.8 million from 7.2 million in 2007, partly because of the recession. Los Angeles World Airports has been studying having a private company take over management of the Ontario airport.
(March 24, 2011) -- In a tax-exempt bond market starved for new sales, it would seem to be a good thing that the Long Beach Unified School District plans to sell $100 million of general obligation bonds. The bad news? About $72 million of that will be sold as taxable Qualified School Construction Bonds. These QSCBs were authorized under the 2009 federal “stimulus” act and function by giving bondholders a tax credit. Our objection is the same as our gripe about the taxable Build America Bonds: the federal government is giving away far too much taxpayer money to subsidize this borrowing. Isn’t it enough that the U.S. government gives up some revenue through tax-exempt municipal bonds? Do we really need even bigger giveaways of taxpayer money in this age of gigantic deficits? At least there is a volume cap on QSCB issuance. The good news? The Long Beach school district will be selling $28 million of “regular” tax-exempt G.O. bonds. They are a solid double-A credit. Looking for an education bond with a twist? The University of the Virgin Islands plans to sell $34 million of general obligation revenue bonds. They are rated BBB by Standard & Poor’s and will provide some juicy yields. Virgin Islands bonds are state and federal tax-exempt for California residents. Speaking of education bonds, the Kingsburg Joint Union High School District’s general obligation bonds received a three-notch upgrade from S&P (rising to A+ from the previous BBB+). The Fresno County high school district has benefited from good financial management, including a buildup of reserves, S&P said.
(March 23, 2011) -- The Emery Unified School District, which ran into fiscal problems in the 1990s that necessitated a state takeover, took another step toward putting this troubled past behind it. Standard & Poor’s upgraded the district’s general obligation bonds by two notches to A+ from A-. “The raised rating reflects our opinion of the district's trend of positive operations and maintenance of very strong unreserved general fund balances over the last several years,” S&P said. The district plans to sell $25 million of new G.O. bonds to upgrade schools. The state takeover occurred a decade ago and the district’s board eventually regained control over day-to-day operations. However, “a state-appointed trustee retains veto powers over the budget until the state emergency loan has been repaid in 2022,” S&P noted. Among a couple things to highlight: The district has had positive operations in five of the last six years and has maintained a minimum of 10% of expenditures in the unreserved general fund, S&P said. In addition, the district levies a special parcel tax that began in fiscal 2007. The parcel tax, approved by voters to last for 10 years, generated about $2.5 million in fiscal 2010, or 22.5% of revenues, S&P noted. The district serves Emeryville, which is between Oakland and Berkeley. Emeryville is at the east entrance of the San Francisco Oakland Bay Bridge. An A+ rating still can translate into a decent tax-exempt yield in today’s market, and sometimes an issuer has to pay a “premium” for past problems, even if it has executed a turnaround.
(March 22, 2011) -- City of Vernon electric system revenue bonds were removed from a list for possible downgrade and affirmed at an A3 grade, Moody’s Investors Service said. However, the outlook is “negative” because of pending state legislation that seeks to disincorporate the city, Moody’s said. Vernon, an industrial city southeast of Los Angeles, is under fire because legislators allege residents are essentially hand-picked by city leaders. The city has faced public corruption charges and also is in the spotlight because of high salaries paid to certain officials. Hearings on the legislation could begin this spring. The proposed disincorporation introduces “long-term uncertainties with regard to the ownership and operation of the city’s electric enterprise that will likely negatively affect its credit quality,” Moody’s said. The bill is silent on how Vernon’s electric system enterprise would be treated. However, “the state’s Local Government Reorganization Act of 2000 contains provisions that explicitly recognizes the continuation of bondholders’ rights in cases of municipal disincorporation,” Moody’s noted. “Los Angeles County would likely be charged with this task, and the Act offers several levers for preserving bondholder security. These range from garnering all of Vernon's assets and settling Vernon’s affairs, including satisfying bondholders, to levying taxes within the former boundaries of Vernon to meet the debt obligations. The county may also choose to continue the operation of the enterprise as it is now, and levy taxes if net revenues are not sufficient. However, levying additional taxes might have the opposite of the desired effect in that it might accelerate an exodus of customers.”
(March 18, 2011) -- The “outlook” for U.S. states and local governments is negative for a third straight year as they face “unprecedented fiscal strains” amid an only slowly improving economy, Moody's Investors Service said. “This may be the most difficult budget season of the downturn,” Moody’s said in a release. “State and local governments will not grow their way out of their budget gaps.” While Moody’s expects more downgrades among state and local governments in 2011, “no state will default on its general obligation debt.” At the local government level, defaults are likely to increase modestly, but are expected to be neither widespread nor systemic, Moody’s added. “Most governments face a revenue and a spending problem, not a debt problem,” the Moody‘s release said. “As a line item, debt payments are not the main pressure point for a budget.” Debt is typically structured with level annual payments, and annual debt costs are a relatively small portion (five percent to eight percent) of a state or local government’s budget, Moody’s added. On the revenue side, “states face the end of most federal stimulus funding in June,” the rating agency noted. “States relied heavily on the stimulus to balance their budgets in the last two years, with stimulus funds comprising 18% of state budgets in fiscal 2010 and 14% in fiscal 2011.” This in turn could mean more cuts in aid for local governments, including schools, cities, and counties.
(March 16, 2011) -- Here is something we used to see all the time and rarely see nowadays. A new municipal bond sale will finally hit $100 million. Hurray! The City of San Jose plans to sell $100 million of special hotel tax revenue bonds. Proceeds will be used to expand and renovate the city’s convention center. In addition, the city plans to sell $31 million of lease revenue bonds for this project. The hotel bonds are rated A2 by Moody’s Investors Service. The lease revenue bonds are rated Aa2 by Moody’s.
(March 15, 2011) -- A Riverside County Redevelopment Agency project area that is the focus of a new deal has been downgraded one notch by Standard & Poor’s. The county’s existing Desert Communities Redevelopment Project Area first lien tax allocation bonds are now rated A-minus instead of A. “We base the downgrade on what we view as declining trends in project area assessed value, which has reduced maximum annual debt service coverage, and additional projected declines,” S&P said. The outlook is stable. The Desert Communities project covers almost 30,000 acres in six sub areas. It is a large residential project area with low taxpayer concentration, S&P said. The county agency this week is selling about $20 million of second lien tax allocation bonds for this project area and they are rated BBB+. The county agency also is selling bonds for other project areas.
(March 14, 2011) -- We noted the other week that is seemed like redevelopment bonds were about the only game in town in California’s new-issue municipal market. The State Treasurer’s Office now says tax allocation bond issuance spiked to $700 million so far this year, compared with $1.2 billion for all of 2010, according to the Los Angeles Times. Local agencies are rushing to sell TABs in case Governor Jerry Brown’s proposal to end redevelopment efforts moves forward. While Brown’s proposal couldn’t impair existing bonds, he wants to see excess redevelopment tax dollars re-directed to schools, counties, etc. State officials are concerned local agencies are paying interest-rate premiums amid the selling frenzy. This is why the Bond Advisor urged buyers to consider these new deals in our February print edition.
(March 10, 2011) -- The Government of Guam plans to sell municipal bonds with investment-grade ratings thanks to support from a hotel occupancy tax. We highlight this fact because some of Guam’s offerings fall in a “junk,” or non-investment grade, category. Interest earned on Guam bonds is exempt from federal and state taxes for California residents and investors elsewhere in the U.S. Standard & Poor’s rates the $89 million sale of hotel occupancy tax bonds BBB+. The Guam Economic Development Authority board plans to review the planned bond sale within a few days. Proceeds would refinance existing 1997A limited obligation bonds, according to an authority document, and pay for capital improvements for tourist projects. “The rating reflects our view of such factors as the vulnerability of Guam's pledged revenue stream to moderate visitor-arrival variability, a decline in room inventory in recent years, and significant concentration of hotel vendors,” S&P said. A “stable” outlook reflects S&P’s “expectation of continued good demand for hotels in Guam as well as relative stability in [hotel tax] revenues over the life of the bonds, notwithstanding our expectation, as we believe history has demonstrated, of occasional declines in [hotel tax] revenues given various risks facing the island (economic, weather-related, and epidemic).” Tourism revenue and U.S. military spending drive the economy of this westernmost U.S. territory.
(March 9, 2011) -- Recently we wrote about a “non-traditional” purpose for municipal bonds that involves a default. The risk is far different for such munis, and yet these “non-traditional” borrowers are being lumped into some people’s default predictions for the overall municipal market. The California Infrastructure and Economic Development Bank sold a series of 2007 senior, subordinate and junior bonds for something called the Sonoma Academy project. This week the subordinate debt service reserve fund for the 2007B subordinate bonds was distributed to the holder of this debt. The reserve fund held almost $72,000, according to bond trustee Wells Fargo Bank. The distribution only affects the subordinate bonds and not the senior or junior subordinate debt, the trustee said. The Sonoma Academy is a private college-preparatory high school in Santa Rosa. We assume these bonds were sold to “big” institutional investors or other sophisticated funding sources. The $6 million of subordinate bonds due in 2032 were initially sold with a tax-exempt 7.05% interest rate, according to trading records. The overall bond deal totaled more than $30 million when it was sold in 2007 so this isn’t an insignificant default. Typically, if only a handful of investors are involved, there will negotiations on extending debt payments, etc. This project benefited from municipal bonds that can be sold for nonprofits. A 2008 story in the North Bay Business Journal said the tax-exempt bonds were purchased by "AIG" and something called "Non-Profit Preferred Funding," as well as four trustees. Insurer AIG, if this is the same investor, ran into well-publicized problems during the financial crisis. Non-Profit Preferred Funding, if it is the same one we have seen before, was discussed as a way for municipal deals to be structured in a way similar to collateralized debt obligations. Such deals package a group of underlying credits and then sell “tranches” of notes (of varying credit quality and standing) to investors.
(March 8, 2011) -- It is probably illegal now to mention anything “good” about municipal bonds, but we join with the Libyan rebels in fighting the powers that be. Standard & Poor’s gave a two-notch upgrade to AA-minus from A on Vallejo Sanitation & Flood Control District series 2006 wastewater system certificates of participation. The district’s “consistent maintenance of extremely strong liquidity” helped drive the upgrade, S&P said. Numerous other agencies in California keep getting one-notch upgrades, even in a difficult operating environment, but noting this “positive” news would be a felony in this age of Chicken Littles predicting muni bond disaster around every corner. Just to provide some “negative” balance, we will mention that S&P’s outlook on the single-A issuer credit rating for Orange County Performing Arts Center is now “negative” instead of stable. “The negative outlook reflects our view that while some aspects of the center’s operations have improved over the last year, this improvement is offset by the center’s slow progress in fundraising and what we feel is significant risk with the center’s debt structure, including renewal risk within the next six months as letters of credit expire,” S&P said. (This center does business as the Segerstrom Center for the Arts.) We mainly mention this outlook change because we remember talking to a reporter about all the variable-rate exposure this issuer took on in the past. The center is selling $58 million of fixed-rate debt with a five-year bullet maturity to refinance series 2008C variable-rate bonds. Three-quarters of the center’s debt will be variable-rate after the refunding, S&P said.
(March 7, 2011) -- Beside the new deals mentioned below (March 4 entry) that could price this week, Puerto Rico also might sell $250 million of general obligation bonds. The University of San Diego, a private Roman Catholic school, also expects to price $19 million of revenue refunding bonds (rated A2 by Moody’s Investors Service). The California Educational Facilities Authority will offer those tax-exempt bonds on behalf of the university. We mentioned the Puerto Rico sale on February 28 on our Research page. The commonwealth’s bonds are federal and state tax-exempt for investors across the U.S., including residents of California. While we are a long-time fan of the commonwealth’s bonds, many “conservative” investors won’t touch the G.O. debt because of lower credit ratings. After last year’s “recalibration” Moody’s Investors Service rates Puerto Rico A3 (with a “negative” outlook). Standard & Poor’s rates Puerto Rico G.O. bonds BBB after an upgrade yesterday and Fitch Ratings, BBB+.
(March 4, 2011) -- For investors looking for something other than redevelopment bonds, next week’s new-issue market might include a couple deals that have been on our Upcoming Sales calendar for awhile. The Fremont Union High School District plans to sell general obligation bonds rated one notch below triple-A (Aa1) by Moody’s Investors Service. Silicon Valley Power (City of Santa Clara) also is lining up its sale of single-A electric revenue refunding bonds.
(March 3, 2011) -- About $714 million of Oakland Unified School District general obligation bonds were downgraded to A2 from A1 by Moody‘s Investors Service. “Operating deficits over the past three fiscal years” helped prompt the downgrade, Moody’s said. This has left the school district with narrower reserves at a time when the state’s budget difficulties suggest a leaner time for education funding, Moody’s added. “The absence of audited financial statements since fiscal 2008 adds to the risk associated with the district’s bonds. The A2 rating continues to incorporate Oakland Unified School District’s very large tax base with slightly above-average wealth levels, and its comparatively high but manageable debt burden.” We find it interesting that Moody’s and Standard & Poor’s have diverged so much on how to handle this school district’s well-publicized financial troubles. Situations like this also can provide yield opportunities for the savvy tax-exempt bond investor. On our Research page on Feb. 15, we that S&P downgraded the Oakland school district to BBB-minus from BBB-plus. However, S&P also went a step further and withdrew its ratings (including underlying ratings) on the district’s bonds. S&P withdrew the ratings because of “our view of the district’s lack of financial audits for the three most recently completed fiscal years, due in part to what we believe are deficiencies in internal financial controls and accounting,” an S&P report said. Moody’s acknowledges the audit problem is a “credit negative.” However, the rating agency focuses on the strength of tax base backing the G.O. bonds. “After two consecutive years of tax base decline, Moody's believes the district’s large $37.7 billion tax base will remain relatively steady going forward as a result of housing prices stabilizing in the region,” Moody’s said. “Given the large size of the district, the rating is not likely to come under pressure even if assessed value were to decline somewhat in the near term.” Moody’s also said it has a “stable” outlook because the school district has identified steps to achieve fiscal balance over the next two fiscal years after taking “strong action” to control strong action in fiscal 2011. A state trustee also provides “strong oversight” on expenditures. (Local control was restored to the Oakland district almost two years ago; in the years prior to that, the state intervened with an administrator and provided a $100 million emergency loan.)
(March 2, 2011) -- Our February print edition took some pains to discuss the current environment for California tax allocation bonds (the headline: “Yield Manna from Heaven? Jerry Brown and Redevelopment Bonds”). As expected, there is now a rush to sell TABs thanks to Governor Jerry Brown’s proposal to all but end future local redevelopment efforts. The legislature is pondering Brown’s plan, though the outcome is far from certain. What is certain is that the “yield manna” just keeps falling. Here are a couple more examples. National City and Sonoma have just priced new redevelopment bonds. Both deals fall in the single-A category, with the Sonoma deal being the higher-rated of the two. Both of them yielded a bit above a tax-exempt 5% for a five-year maturity and about 6.25% on a 10-year bond. Lots of other redevelopment bond deals are being assembled and a handful more will probably price this week alone. The City of Riverside and Riverside County might sidestep the municipal market altogether because of higher borrowing costs on tax-exempt bonds in the current environment.
(March 1, 2011) -- The Galt Redevelopment Agency priced new tax allocation bonds the other day and paid a tax-exempt 7.25% on a 15-year maturity. Of course, the TABs are rated BBB+, and investors also can command a yield premium because many other redevelopment agencies are rushing to market. The rush to sell TABs is being driven by Governor Jerry Brown’s proposal to all but end future local redevelopment efforts. The legislature might not support Brown’s plan. The Taxable Equivalent Yield on the 15-year Galt bonds is above 10% for people in plenty of tax brackets. In contrast, the Cupertino Union School District recently priced general obligation bonds that are rated Aa1 by Moody’s Investors Service, or one notch below triple-A. The 15-year bond in that deal yielded a tax-exempt 4.47%.
(Feb. 28, 2011) -- ACA Financial Guaranty Corp. has posted its annual financial statement for 2010. ACA, once a single-A bond insurer, now operates as a “runoff” insurance company after a settlement with Maryland’s insurance department. The company’s insurance still covers about $5.6 billion of municipal obligations, including about $1 billion in California. “The extent and duration of any future deterioration in the tax exempt bond market is unknown, as is the effect, if any, on potential claim payments and the ultimate amount of losses the Company may incur on obligations it has guaranteed,” ACA said in its annual statement. The company classifies its insured portfolio in one of four credit quality categories. As of December 31, 2010, ACA said it had insured obligations with outstanding principal totaling $335.0 million classified in category 4, which means that it either has paid claims on such exposures or expects to pay claims on such exposures in the future. In addition, ACA said it had insured obligations with outstanding principal totaling $503.6 million classified in category 3, which means those credits have materially violated financial and operational covenants and require remedial action to avoid further performance deterioration. Among prominent deals ACA backed, we have written often about the California Infrastructure and Economic Development Bank refunding revenue bonds (Series 2007A and Series 2007B) for the failed COPIA: The American Center for Wine, Food & The Arts Project. The bond reserve fund is expected to cover a June 2011 interest payment on the Wine center project. If shortfalls start to occur after that, ACA’s financial guarantee will be tapped.
(Feb. 25, 2011) -- About $30 million of Calexico Unified School District general obligation bonds have been downgraded two notches by Moody’s Investors Service. The rating fell to A3 from A1. Financial operations have actually been sound in recent years and also in fiscal 2010, Moody’s said. However, the rating agency is concerned about recent management turnover at the superintendent and business officer levels. These vacancies “affected the district's ability to maintain standard financial reports,” Moody’s said in a report. On the positive side, the district has a history of fiscal prudence and sound reserve levels. It also has taken interim steps to fill management positions, Moody’s said. The area’s high unemployment could produce added fiscal pressure. We conclude with a quote from Moody’s about a strange item. “The district has a $4.4 million outstanding debt in a variable rate lease agreement with Zion Bank,” Moody’s said. “The district has no documentation or familiarity with the structure of the lease. A key element to the rating is the district’s unrestricted cash reserves, which are greater than the total amount of variable rate outstanding. This level of liquidity should make the debt manageable regardless of its structure. The district has always maintained debt service payments, but its unfamiliarity with its debt obligations is a credit negative for the district’s management profile.” New management might want to become “familiar” with this debt obligation!
(Feb. 23, 2011) -- The senior unsecured A2 rating of the California Housing Finance Agency is on watch for possible downgrade, Moody’s Investors Service said. The action affects long-term unenhanced ratings on about $1.1 billion of bonds. Most of them involve Multifamily Housing Revenue Bonds III, along with a smaller portion of Housing Program Bonds. (Keep your bonds straight. Multifamily Housing Revenue Bonds II aren’t affected by the downgrade warning. Those bonds are rated A1 and on “watch” with direction uncertain, Moody’s said.) “Our review was prompted by factors affecting CalHFA’s capacity to meet liquidity demands, particularly collateral posting obligations under interest rate swap agreements which have been sustainable to date at the current rating level but which may exceed CalHFA’s resources in the event that any rating of the Agency’s senior unsecured credit is lowered by two or more notches,” Moody’s said in a report. “During our review, we will assess California’s capacity to respond to potential liquidity needs. We will also review other credit factors related to CalHFA’s large and complex portfolio of variable rate debt and interest rate swaps, including swap basis expense, interest rate risk and counterparty exposure.” Separately, Moody’s also placed the A3 unenhanced long-term rating of California HFA’s Home Mortgage Revenue Bonds on watch for possible downgrade. The move affects about $6 billion of bonds. Moody’s cited the “potential credit deterioration” of Genworth Mortgage Insurance Corp., which is a reinsurer for mortgage loans in the HFA portfolio. On February 10 we mentioned that S&P also is considering a downgrade because of developments affecting Genworth
(Feb. 22, 2011) -- The deal to watch in this week’s new-issue market? The Fremont Redevelopment Agency may price $138 million of tax allocation bonds to help pay for a new Bay Area Rapid Transit station. The deal will offer solid debt service coverage ratios and is rated A2 by Moody’s Investors Service and A+ by Standard & Poor’s. We find yields on new (and existing) redevelopment bonds to be compelling, in part because of an overreaction to Governor Jerry Brown’s proposal to curtail local redevelopment efforts. Brown’s proposal would protect debt service on existing tax allocation bonds (in fact, it has to because these obligations cannot be undone after the fact). A stagnant real estate market also is leading to downgrades of some redevelopment bonds because of declining assessed valuations. However, investors are making a huge mistake if they lump all redevelopment bonds into one basket. Just as with nonprofit health systems and tax-exempt bonds, there are plenty of “solid” issuers in the redevelopment sector. Right now investors can pick up some interest-rate premiums by doing their homework and buying the stronger tax allocation bonds. The Fremont deal is a great example. Using projected fiscal 2011 net revenue as an example, debt service coverage is 2.27 times the projected maximum annual debt service. In addition, the agency doesn’t have any parity debt outstanding because it previously used cash on hand to prepay its 2004 tax allocation bonds. The merged project redevelopment area supporting the bonds also offers a large $3.8 billion assessed valuation. This assessed valuation recently dropped 5.5% and more property owner appeals might lead to another reduction. However, since the bond deal is being structured conservatively to build in a cushion, downgrade risk is lowered. Some investors won’t even look at a single-A municipal bond. Too bad for them. This is an example of a deal that merits attention, especially if the tax-exempt yields are juicy enough. Investors who want to lower their "risk" can stick with shorter maturities.
(Feb. 18, 2011) -- Even with Monday’s holiday, the new-issue market won’t be without interesting angles in California next week. For example, the Fremont Redevelopment Agency may sell $138 million of tax allocation bonds to help pay for a new Bay Area Rapid Transit station. The bonds will offer solid debt service coverage ratios and are rated A2 by Moody’s Investors Service and A+ by Standard & Poor’s. We plan a longer review of this deal in coming days because it is an intriguing sale at a time when “negative” headlines are scaring unsophisticated investors away from redevelopment bonds in general. Other redevelopment agencies continue to line up bond sales in an effort to “protect” existing revenue streams, largely as a reaction to California Governor Jerry Brown’s proposal to curtail local redevelopment in the future. Another sale that has been floating around on hold for weeks is about the same size as the Fremont deal (around $135 million). The Grossmont Healthcare District might price the general obligation bonds next week. They are rated Aa2 by Moody’s. Again, at a time when “negative” headlines loom over the health care sector, savvy investors might pick up some interest-rate premium on otherwise solid issuers. The Grossmont district serves eastern San Diego County. Separately, Moody’s upgraded about $620 million of municipal revenue bonds backed by Scripps Health to Aa3 from A1. Scripps serves San Diego and Moody’s noted its “strong and stable” operating performance.
(Feb. 17, 2011) -- The other day another local redevelopment bond in California was downgraded. About $30 million Series 2007 tax allocation bonds issued by the Banning Redevelopment Agency were lowered one notch to BBB from BBB+, Fitch Ratings explained in a report. Anyone who drives from Los Angeles to Palm Springs (or the Morongo Casino) recognizes Banning as a sign you are crossing into the “real” desert. It is roughly 20 miles west of Palm Springs. The city also benefited from past housing booms and “overflow” growth after homes in other cities became too expense. The problem, of course, is that housing “busts” hit areas such as Banning relatively hard, and the current real estate downturn is taking its toll. A “further significant assessed value decline” prompted the latest downgrade, Fitch said, and the outlook remains “negative” because of pending appeals seeking to lower taxes. However, there are some pluses for the merged redevelopment project area backing the 2007 bonds. It is large, covering almost a quarter of Banning’s land area. The project area also is diversified, with about half residential and the rest either commercial, industrial, or vacant. The debt service coverage ratio for maximum annual debt service could bottom out in fiscal 2013 at 1.12 times depending on one scenario projected by Fitch. If assessed valuation cuts go even deeper, Fitch said the agency has other revenue sources (such as interest income) before it would have to consider tapping a cash-fund debt reserve fund. Such downgrades and “negative” headlines in general about redevelopment also can create opportunity. We tried to find one of these Banning bonds that traded recently. Prior to the downgrade, one buyer picked up a 2021 maturity (due in 10 years) at about 87 cents on the dollar to yield a tax-exempt 5.68%. The Taxable Equivalent Yield is above 8.5%, even for a lower 28% federal tax bracket. Granted, that was a smaller $15,000 trade. The “asterisk” we mention in the headline is that the yield comes with a catch, including more downgrade risk. But actual default risk is another thing, and we are smelling some interesting opportunity amid the current “negative” news hammering redevelopment agencies. Our print readers will see that we have a lot more to say about this very soon. By the way, the Banning bond issue was originally guaranteed by FGIC, and we assume the MBIA successor company that took over most FGIC deals now backs this one. A closing quote from the Fitch report: “The governor's proposed fiscal 2012 budget, which seeks to eliminate redevelopment agencies statewide, was not a factor in the rating as under the proposed plan the existing debt and other contractual obligations would be repaid as they come due.”
(Feb. 16, 2011) -- We don’t usually discuss one-notch rating changes in either direction unless there is a substantial trend at stake. However, we make an exception in this case just because it involves a municipal bond rated below investment grade. Standard & Poor's has upgraded bonds issued for Good Samaritan Hospital in downtown Los Angeles to BB from BB-minus. The hospital is showing signs of “longer-term improvement in operating performance,” including “solid” cash flow and stronger maximum annual debt service coverage, S&P said in a report. The outlook is “stable,” even though S&P expects a “decline” in certain liquidity measurements when the hospital uses cash and investments for an upcoming construction project. The rating change affects Series 1991 revenue bonds issued by the California Health Facilities Financing Authority.
(Feb. 15, 2011) -- Standard & Poor’s ratings on some Lancaster redevelopment bonds tumbled a handful of notches because of assessed valuation declines and other factors, such as the way debt service reserve funds are structured. Bondholders need to consider a few things before making any knee-jerk reaction to these downgrades, especially because you’ll get hammered for panic selling. For example, this doesn’t mean a “real” default will occur, even if reserve funds had to be tapped temporarily. (Some agencies also have enough flexibility to avoid reserve draws.) Here are the downgrade details. S&P lowered its underlying ratings (meaning these bonds also carry a financial guarantee) to BB from BBB+ on Lancaster Financing Authority, Series 2003, 2003B, and 2004B subordinate tax allocation revenue bonds sold for Lancaster Redevelopment Agency Amargosa, Residential, and project areas No. 5 and No. 6. The underlying rating on the authority's 2006 subordinate TABs, issued for the agency’s Amargosa, Residential, No. 5 and No. 6, and Fox Field project areas, also fell to BB from BBB+. One concern centers on “large declines” in the total assessed valuation in the last two years, S&P said in a report, especially in regard to the Residential and Project No. 5 areas. Other issues include non-investment-grade ratings on the debt service reserve funds for the 2003 and 2003B bonds, and the lack of indenture language for the way (a timing issue) debt service reserve funds get replenished, S&P said. The assessed valuation trends cited by S&P raise an issue because they mean the debt service coverage ratios could be thin for a handful of years (a few other redevelopment agencies might be looking at tapping debt reserve funds to make up shortfalls). So far, however, the Lancaster agency “has practically managed pledged nonhousing tax increment across all project areas to meet debt service in fiscal 2011 and the authority has not accessed the debt service reserves,” S&P said. The rating outlook also is “stable” after the downgrade on grounds the assessed valuation decline might be bottoming out, though there is still some risk of further drops, S&P said. We didn’t check these deals yet but certain “old” bond insurers are better off than others in terms of whether the guarantee will be met.
A 19% assessed value decline in fiscal 2011 also prompted S&P to downgrade its rating to BB+ from BBB+ on Lancaster Financing Authority Series 2004 and 2006 school district projects tax allocation bonds. These were sold for the Lancaster Redevelopment Agency’s project areas No. 5 and No. 6 (PA 6). The outlook is stable. Once again, the coverage ratios for debt service could be thinner than planned. However, that doesn’t mean a “real” default for bondholders will occur because reserve funds are fully funded and could help cover any temporary shortfalls over the assessed valuation drops. Citing assessed valuation declines, S&P also cut its rating to BBB+ from A on Lancaster Financing Authority Series 2003, 2003B, 2004B, and series 2009 housing tax allocation revenue bonds. This debt was issued for Lancaster Redevelopment Agency’s Residential, Central Business District, Fox Field, and Amargosa project areas as well as project area Nos. 5, 6, and 7. The outlook is negative because of the risk of more assessed valuation declines. This downgrade is less problematic compared with those going below the BBB- level.
(Feb. 14, 2011) -- In Friday’s weekly market summary we discussed a bond sale that “took the cake” for relatively high tax-exempt yields. That was before we saw the yields on another recent new deal, the Reedley Redevelopment Agency tax allocation bonds. A customer bought some five-year new bonds at 98.9 to produce a tax-exempt yield of 5.10%. That is a full percentage point above the other bonds that we said “took the cake.” The 10-year bond yielded a tax-exempt 6.50%. The Reedley TABs were rated A-minus by Standard & Poor’s. That is one factor driving higher yields, especially for a sale like this. We have noted for a couple years that many single-A (and lower) redevelopment bonds offered enticing yields, in part of the economic downturn that scared some investors away from this sector. Smart investors evaluate TABs on a case-by-case basis rather than turning tail and running from an entire sector. New-issue redevelopment bonds also are paying a premium after Governor Jerry Brown proposed doing away with local redevelopment in the future. While existing bonds can’t be undone, issuers are being penalized because of all the complexities stemming from Brown’s proposal. Brown’s proposal and the A-minus rating pushed these yields higher.
(Feb. 10, 2011) -- California Housing Finance Agency bonds issued under the agency’s home mortgage indenture (and currently rated single-A) face a potential downgrade by Standard & Poor’s. The CreditWatch action with negative implications “reflects our opinion of private mortgage insurance from Genworth Mortgage Insurance Corp.,” which S&P recently downgraded, the rating agency said in a report. “We will assess the sufficiency of assets and revenues to absorb our projected loan losses, and determine what, if any, reliance the bond program has on cash contributions by CalHFA from other funding sources.” S&P downgraded Genworth mortgage insurance units after a surprise fourth-quarter loss.
(Feb. 9, 2011) -- Certain California bonds used to finance office buildings will stay outstanding after Governor Jerry Brown canceled a plan to sell and leaseback the 11 state properties. Former Governor Arnold Schwarzenegger’s 2010 budget had said the sale and leaseback plan would generate $1.2 billion in revenue. Brown said today (Feb. 9) that the proposal was “short-sighted” because it would have cost taxpayers more money over time for long-term leases. If the sale and leaseback had occurred, the state would have defeased or redeemed municipal lease-revenue bonds tied to the individual projects. Those bonds will stay outstanding. To replace the one-time revenue the sale would have generated, Brown will amend his proposed fiscal 2012 budget to borrow $830 million from internal special fund reserves, a governor’s release said, a move that will cost $18 million in interest. That money will be paid back by fiscal 2014. Other additional revenue and cost savings will make up the rest of the gap between the $1.2 billion and $830 million, Brown said.
(Feb. 9, 2011) -- The City of Commerce Joint Powers Finance Authority provided a notice update the other day on negotiations with Los Angeles County over a tax increment limit for Redevelopment Project Area No. 1. That doesn’t sound too sexy, but the disagreement the two entities are having matters. Commerce believes the tax increment limit was going to be $290.6 million. The county has put this limit at $263.3 million. The county’s number creates a problem because it creates a shortfall in what is needed to meet certain bond covenants, the Commerce update explains. To remedy this problem, the development commission has taken other steps to be “in full compliance of all bond covenants,” the update explains. (The update affects 2007A and 2007B tax allocation bonds, and 2003A, 2003B, and 2003C bonds.) On February 1, for example, the commission approved a transfer of tax revenue from other redevelopment project areas for the Project Area No. 1 housing requirement to reduce total debt service by $29.2 million, Commerce said. The commission still has to reduce debt service by another $6.5 million to comply with 2007 indenture covenants for fiscal 2011. To accomplish this, it approved using cash on hand to repurchase 2003A and 2007A bonds in the open market. “An analysis shows that at current assessed value levels and with no future growth in these values, the Commission will be able to fully pay or redeem all Project Area No. 1 debt obligations on or before their maturity dates,” the update says. The 2007B bonds fully mature on Aug. 2, 2011, and are unaffected by these actions. The commission also is taking a third step. It will continue efforts to amend the tax increment limit to satisfy the 2007 bond covenants. However, for now negotiations are "on hold" by the county because of Governor Jerry Brown’s recent proposal to eliminate local redevelopment agencies. Whether or not Brown’s proposal ever moves forward, this is an interesting example of how putting things “on hold” has real-world consequences. Redevelopment agencies and counties often are in talks over various matters, such as pass-through dollars, etc., and we wonder how many other discussions are “on hold” because of the governor’s proposal. That doesn’t always mean there will be a bond angle, but Commerce did the right thing in this instance to address a potential issue.
(Feb. 8, 2011) -- It is probably against the law now for any sane and accurate commentary about the relative safety of municipal bonds, not when certain “negative” news for munis has become the accepted wisdom (apparently now and forevermore). So keep this “good news” about a small issuer under your hat so you’re not arrested by the “negative” news police. The other day the King City Union (Elementary) School District received a two-notch upgrade from Standard & Poor’s. The underlying general obligation bond rating rose to A from BBB-plus, S&P said, based on “substantially improved financial performance.” (An “underlying” rating is based on the district’s own credit standing; that means a financial guarantee also backs the bonds.) Among other things, the financial improvement resulted in the school district’s “release from Monterey County’s supervision,” S&P said. The district still faces some challenges from declining average daily attendance and “likely” revenue pressure from the state, but it also has strengths such as “low overall net debt” and recent maintenance of a stronger unreserved general fund balance, S&P said. In recent days a few other S&P municipal bond ratings in California have risen, usually by one notch but sometimes by more. For example, certain redevelopment project areas have been upgraded thanks to improved financial cushions. This, however, constitutes “good news” and we prohibit everyone from disseminating it beyond this page. God forbid that any good news gets out and pushes tax-exempt yields lower.
(Feb. 7, 2011) -- On February 2 we highlighted a couple new sales that could price this week, including the San Joaquin County Transportation Authority sales tax revenue bonds. A San Bernardino City Unified School District general obligation bond also could price this week. A handful of other local school G.O. deals also might price this week, according to underwriters. The Burbank Unified School District is lining up double-A general obligation bonds in a deal of around $13 million. The Piner-Olivet Union School District in Santa Rosa might price about $8 million of G.O. bonds (Moody’s Aa3). The Fairfax Elementary School District is weighing a $6 million G.O. bond sale (A+, AA). The State of California is holding off on new G.O. bond sales until later this year. However, a new sale offers another way to get a deal backed by the state. The California Health Facilities Financing Authority expects to sell, perhaps as soon as this week, $45 million tax-exempt bonds. The deal is for the Community Program for Persons with Developmental Disabilities in the San Francisco Bay Area. Bond proceeds will refinance loans that helped to acquire and renovate homes for persons with developmental disabilities. The bonds are insured by the state’s Cal-Mortgage program and ultimately backed by a pledge on parity with a California G.O. That means the credit ratings on the CHFFA deal are the same as the state’s current G.O. rating (A-minus or A1). The CHFFA sale also includes taxable bonds. If the state’s lower-rated credit isn’t low enough for your taste, another well-known issuer with lower ratings might sell G.O. bonds this week. Puerto Rico is considering a sale of less than $100 million and these bonds are rated A3, BBB-minus, and BBB-plus. Compared with years past, investors have been recently rewarded with extra interest-rate premiums on Puerto Rico bonds. And remember, interest earned on the commonwealth’s bonds is exempt from both state and federal taxes for California residents. Want to know what a “low” single-A municipal bond recently yielded? Here is an example from an $80 million new-issue pricing last week. The California Educational Facilities Authority sold the debt on behalf of the private University of San Francisco (Moody’s, A3). A five-year bond yielded a tax-exempt 3.72% and a 10-year maturity, a tax-exempt 5.20%. Once you calculate the Taxable Equivalent Yields you can see why we smell “opportunity” in the air after the recent sell-off. Since there are a few school district sales pending, what did a recent school G.O. yield? In late January the Shasta Union High School District priced AA-minus G.O. bonds. The five-year tax-exempt yield was 2.80% and the 10-year, 4.26%.
(Feb. 4, 2011) -- Fitch Ratings slashed its rating to BB+ from single-A on about $153 million of subordinate tax allocation bonds issued by the Pittsburg Redevelopment Agency. The agency’s $140 million of senior TABs fared better; a one-notch downgrade dropped them the senior tax allocation bonds to A from A+. About $28 million of Pittsburg housing set-aside TABS were downgraded to BBB from A by Fitch. The five-notch downgrade for the subordinate bonds “reflects the bonds’ inadequate debt service coverage levels resulting from a substantial three-year [assessed valuation] loss, a severe slow-down in new construction activity, and a very weak economy that may continue to weigh on the housing market and [assessed valuation] levels,” Fitch said in a report. It isn’t easy to find a silver lining after a five-notch downgrade. Even so, the redevelopment agency is looking at a way to boost the future debt-service coverage ratio for the subordinate bonds. It would accomplish this by buying about $10 million of subordinate debt with a supplemental reserve required by a letter-of-credit agreement. Such a purchase might help the projected subordinate debt-service coverage levels stay at 1.12 times in fiscal 2012 and 2013, and 1.06 times in fiscal 2014. The benefit of such a move could be offset if assessed valuation continues to drop in the redevelopment project area, Fitch said. A good chunk of the subordinate debt is in variable-rate mode and represents a “significant credit vulnerability,” Fitch said. Interest rates on the variable-rate bonds could jump unless the redevelopment agency can renew or replace a letter-of-credit for the variable-rate debt. The LOC expires late in 2011. A cash-funded debt service fund is a plus for the subordinate bonds. According to Fitch, “it would take a significant [assessed valuation] decline followed by a long period of below-average AV growth to deplete all debt service reserves.” Other supplemental revenue and unpledged cash reserves could be tapped for debt service if pledged reserves were depleted by 2020 under a “more onerous stress scenario” for assessed valuation levels, Fitch said. All this is a way of saying debt service should be met in the years ahead, though various reserves might be used for that purpose if real estate values see a sharp drop.
(Feb. 3, 2011) -- It doesn’t seem to us that readers of our print edition needed us to make any comment on the wacky municipal bond default prediction that has gotten tons of attention since a certain analyst appeared on a certain prominent “news” show. Last summer, for example, we went back 20 years to look at some of the wacky stuff circulating in the media about the municipal bond meltdown that was supposedly imminent way back then. Times have changed, new stresses have arisen, and we have made it clear we don’t discount added credit risk for munis going forward. In our recent January edition, however, we asked a question that many haven’t. While we don’t expect “hundreds of billions” of dollars in muni bond defaults, what is the mechanism that would even generate “billions” in defaults in a short period, or even hundreds of millions? Will local and state agencies just up and repudiate their debt? We ask those questions in light of the bankruptcy experience of the City of Vallejo, where the vast majority of debt with various links to the city’s name kept getting paid regardless Vallejo’s deep mess. We had some other things to say in the recent print edition about the recent “default” prediction. Sometimes smart investors just have to be thankful for the opportunities generated by the Chicken Littles of the world.
(Feb. 2, 2011) -- Our Upcoming Sales page is still blank since we are updating the list and also trying to figure out which deals might be coming soon, despite recent market turmoil. It is worth flagging a couple upcoming deals given that the muni market‘s new-issue activity is a bit slow. The San Joaquin County Transportation Authority plans to sell more than $200 million of sales tax revenue bonds, with the pricing expected within a week’s time. Moody’s Investors Service rates the bonds Aa3 and Standard & Poor’s, AA. San Joaquin County is located east of the San Francisco Bay area and features Stockton as the county seat. A countywide half-cent sales tax backs the bonds. We tend to favor these type of sales-tax bonds as being appropriate for many investors because of the cushions built into the deals, regardless of economic cycles that drive tax revenue up and down. For example, the San Joaquin County Transportation Authority annual net sales tax revenue peaked at about $47.2 million in both fiscal 2006 and 2007. The recession helped lower this revenue to $35.5 million in fiscal 2010, marking a 12.2% decline over fiscal 2009. (We are taking these figures from the preliminary official statement.) The authority is budgeting for $36.6 million of sales tax revenue in fiscal 2011. In the last three quarters of 2010 the revenue increased over 2009 figures, according to unaudited numbers. Regardless of these trends, the authority maintains “strong” debt service coverage and must meet a 1.5 times test for the debt service coverage ratio when additional bonds are issued. The upcoming deal will pay off bond anticipation notes sold in 2008. Another deal on the imminent calendar involves about $13 million of tax-exempt general obligation bonds from the San Bernardino City Unified School District. (The district is also selling a larger chunk of taxable debt.) S&P rates the bonds A and Moody’s A1. What caught our eye is that Assured Guaranty Municipal might guarantee the bonds, according to the preliminary official statement. AGM’s guarantee is currently rated AA+ by S&P and Aa3 Moody’s. However, as we note in a February 2 posting here, Assured Guaranty isn’t happy about an S&P proposal to change bond insurance criteria. Assured Guaranty, by the way, managed to post record earnings in recent quarters, even though it has a small niche in the muni market compared with the days when triple-A insurers roamed the land. It will be interesting to see how investors value the AGM guarantee while S&P’s proposed criteria change is hanging over the market. The rating agency is taking comments on its proposal through March 25.
(Feb. 2, 2011) -- Municipal bonds backed by the University of Redlands, a private university, have been downgraded three notches by Fitch Ratings. They are now rated BBB instead of single-A. The downgrade affects $75.5 million of bonds issued for the university by the California Educational Facility Authority. Fitch cited “several consecutive operating margin deficits” and “significant declines in balance sheet cushion.” In recent years operating expenses have outpaced revenue growth at the University of Redlands, Fitch said. In response, available funds “declined precipitously in recent years,” the rating agency added. A three-year financial plan to address the negative trends, and help cut expenses, might be bearing some fruit. “Through the first half of fiscal 2011, management reports progress in implementing the budget plan, and that UR remains on track to return to positive performance by 2013,” Fitch said in a report. The rating agency “believes that restoration of a breakeven-to-positive operating margin is essential for UR to rebuild its level of available funds.” The university also seeks to increase revenue through projected enrollment growth. “Failure to achieve projected growth could trigger further negative rating action,” Fitch said. No one is thrilled about seeing a bond issue cut three notches. That kind of move gets our attention far faster than one-notch changes or “outlook” adjustments.” Even so, there isn’t much sense behind selling “into” bad news unless it appears an issuer really will be going south. Steps are being taken to right the ship and, even if there is still a glitch or two, the University of Redlands should be able to build on its existing base to muddle through.
(Feb. 1, 2011) -- In late 2008, when the municipal bond market was frozen and panic-driven or forced selling hammered tax-exempt debt, we told people to rip the copper pipes out of their homes to raise cash for buying munis. We considered it a fantastic buying opportunity, regardless of what the herd was doing. Well, guess what? The lemmings have been running for the cliffs again. Although the panic might be subsiding a bit, certain types of investors have been dumping muni bonds left and right in recent weeks, mainly in response to an exaggerated prediction of default risk for tax-exempt debt. So is it late 2008 all over again? Our latest print publication looks at the issue of opportunity again. It also discusses some of the recent “negative” headlines for munis, including the infamous default prediction. We will make a short observation. A few months ago some high-quality California muni issuers were able to sell a tax-exempt 10-year bond that yielded less than 3%. In contrast, just the other week a new sale of general obligation bonds yielded 4.26% in 10 years. A new bond for a big health system yielded 4.92% in 10 years. A sewer revenue bond yielded a bit more than 4.60% in 10 years. A new tax allocation bond sale included a nine-year maturity that yielded a 5.70%. In January’s issue we mention why some deals are yielding a premium (one of our new governor‘s proposals is the answer). Still, these are tax-exempt rates, so the Taxable Equivalent Yield is quote juicy depending on a buyer‘s tax bracket. As our January issue discusses in more depth, the issue isn’t just “opportunity,” but also just how long the opportunity might last.
(Jan. 26, 2011) -- In previous updates and in a letter to subscribers, The Bond Advisor noted it had acted against certain individuals who have either misused our content or otherwise distributed it without permission. A new letter going to subscribers on Jan. 29 provides updates on several steps we have taken to deal with such issues and our print publishing schedule, including the plan for resuming "limited" free updates here in February. In the future most updates will be provided only to existing subscribers to the print edition. More to say on this beginning next week.
The older archived material below will be removed soon for new content.
(Aug. 27) -- The new sales calendar for tax-exempt bonds looks slow as the month of August winds down. We expect a Colton school district, a Fullerton high school district, and a Lafayette elementary school district to be in the market next week with general obligation bonds. The California Educational Facilities Authority plans to sell $47 million of revenue bonds. We believe the sale is tied to Santa Clara University. A handful of other new sales might pop up, but it might take until after Labor Day before new issuance starts to heat up again.
(Aug. 10) -- City of Bell general obligation and pension obligation bonds have been downgraded five notches by Standard & Poor’s amid a controversy over the city’s financial practices, beginning with the outrageous salaries paid to certain administrators. The G.O. bonds are now rated BB, down from A-minus, and remain on a list for possible downgrade. Bell’s lease revenue bonds fell to BB-minus from BBB-plus. Questions have arisen about Bell’s ability or willingness to meet an upcoming payment on a series 2007 taxable lease-revenue bond that was privately placed with a big institutional investor. That is one issue S&P is monitoring. The downgrade action was spurred by “our assessment of Bell’s ability and willingness to either refinance or pay an imminent Nov. 1, 2010, bullet maturity for the city's $35 million series 2007 taxable lease revenue bond issuance,” S&P said. The maturity on that private placement debt has already been extended, S&P added. The Bond Advisor reminds readers that a G.O. bond and a pension obligation bond benefit from far greater security than a lease-related security; financial controversy alone can’t undo the unlimited ad valorem pledge securing general obligation debt. However, Bell’s decision to remove certain highly-paid administrators means the city also has to find ways to resolve management issues at a time when the city faces growing scrutiny from residents and outside politicians.
(Aug. 5) -- Recently we discussed the City of Maywood and its decision to contract out most of its services to a neighboring city. That deal is being questioned because the neighboring city happened to be the City of Bell, which is embroiled in controversy over outrageous salaries paid to certain administrators. The other day Standard & Poor’s withdrew its BBB rating on Maywood Public Financing Authority series 2008A lease revenue bonds. S&P said “the lack of timely information” from the city prompted the rating withdrawal.
(Aug. 4) -- Fitch Ratings has lowered its rating on Puerto Rico Aqueduct and Sewer Authority bonds to BBB from BBB+, citing weakened financial performance. The action affects $1.3 billion of sewer revenue bonds. The main reason we even mention the one-notch downgrade is because we know some of our readers have long bought Puerto Rico bonds to diversify their portfolios. They are state and federal tax-exempt for California residents and other U.S. taxpayers. The investors we know also aren’t hung up about the triple-B rating because they know the authority is the sole water provider for Puerto Rico, a key plus when an “essential” service is involved. Nevertheless, investors still would prefer to see the utility avoid downgrades whenever possible. Part of the issue is that the authority has put off rate hikes to help customers during a tough economic downturn; certain other utilities in the U.S. have made similar decisions. That has made the authority more dependent on appropriations from the commonwealth to help cover operating deficits, Fitch said. One interesting thing to mention: the authority was rated BBB-minus until this spring, when Fitch “recalibrated” its ratings higher to reflect the relative risk of municipal bonds to corporate debt. The authority’s rating rose to BBB+ after recalibration and, even after the downgrade, the rating is a notch higher than it was a few months ago.
(July 29) -- Since it is always easier to flag downgrades rather than upgrades, we are glad to highlight issuers that are having a “good” month in the credit rating department. Alameda Municipal Power (AMP) has now been upgraded by Standard & Poor’s to A+ from A. Earlier in July AMP received a two-notch upgrade to A+ from A-minus from Fitch Ratings as the utility gets ready to refinance all of its outstanding certificates of participation. “Strong resource planning,” including clean energy efforts to meet environmental regulations, is one positive, S&P said. Good financial performance and getting out of a telecommunications business that didn’t pan out also have helped AMP, S&P said.
(July 28) -- In our July print edition we discussed how debt service reserve funds can be cited as factors in credit ratings, often in a variety of ways. We were reminded of this again when we were reading about a three-notch downgrade for a tax-exempt multifamily housing bond. This week Standard & Poor’s cut its rating for the Citrus Gardens Apartments project in Fontana to BBB from A on senior 2002D-1 bonds. The rating fell to BB from BBB on junior 2002D-3 bonds. The California Statewide Communities Development Authority issued the debt for the project. Declining debt service coverage levels played a role in the downgrade. The senior bonds coverage ratio has gone to 1.28 times maximum annual debt service on the senior bonds and 1.15 times on the junior bonds, S&P said. Net occupancy at the 200-unit apartment project also fell to 90% from 93% in 2009 over 2008. The project also has a high loan-to-value ratio of 98%, S&P said. The outlook is “stable” because the property can generate “sufficient rental income at the current rating level,” S&P added. The various weaknesses the rating agency expressed concern about “are partially offset” by a debt service reserve fund that is funded at 12 months of maximum annual debt service. Standalone apartment projects such as this one can be prone to such downgrades when market conditions change. There are also more vacancies in this project’s submarket, S&P noted.
(July 22) -- Moody’s Investors Service has weighed in with rating or outlook changes on a couple of issuers we already discussed this week. Moody’s downgraded the Eisenhower Medical Center in Rancho Mirage to Baa1 from A3 ahead of a planned municipal bond sale by the Rancho Mirage health provider. A doubling of debt over the last three years is one concern, Moody’s said, and the medical center will need to keep generating “strong operating margins” to maintain adequate debt service coverage ratios. Fitch Ratings cut the rating to A-minus from A this week. We stand by our item below (July 20) that “bad” news can also provide a buying opportunity if an investor is seeking added yield from a new bond issue. Separately, Moody’s changed its outlook to “negative” from “stable” for bonds tied to Sacramento International Airport. Moody’s cited reasons that mirror the rationale for a recent S&P downgrade of this same credit, including weaker passenger traffic and higher debt levels. Moody’s rates Sacramento County bonds for the airport A2 and S&P now rates them A after a one-notch downgrade (see item below).
(July 21) -- A growing debt burden and declining passenger traffic prompted Standard & Poor’s to downgrade by one notch bonds tied to Sacramento International Airport. The Sacramento County senior-lien bonds for the airport dropped to A from A+. Subordinate and passenger facility charge bonds fell to A- from A. Debt service coverage levels will drop in coming years as the airport adds bonds to finance improvements, including a new $1 billion passenger terminal. So-called enplanements will drop 3.3% in fiscal 2010 to 4.5 million, according to projections. This traffic might rise to 5 million by fiscal 2016, which was the amount registered in fiscal 2005. The recession has hit passenger traffic in recent years. A $132 million bond sale for the airport is planned soon.
(July 20) -- Investors in stocks sometimes will buy on “bad” news if they think a company’s longer-term prospects remain bright. We were thinking about this approach as the Eisenhower Medical Center in Rancho Mirage gets ready to sell $102 million of revenue bonds. This non-profit health provider has a strong market position in and around Rancho Mirage, an affluent city near Palm Springs. Even so, Fitch Ratings just downgraded its bonds to A-minus from A. While Fitch acknowledges the medical center’s numerous strengths, it said “significant capital improvements” have led to a high debt burden and weaker “liquidity” position. After the upcoming sale the medical center will have $392 million of bonds outstanding. However, the capital spending also will have an upside, Fitch said, by improving the medical center’s future growth potential. Over time it will “grow” into this high debt burden, especially because the need for capital spending will soon decline. The medical center also is adept at fund raising. Income-oriented investors might see the downgrade as a chance to pick up a little added yield on a solid credit. The California Municipal Finance Authority is issuing the bonds.
(July 19) -- There will be several sales of “competitive” bonds this week. In a competitive sale, underwriters submit sealed bids and the one with the lowest borrowing cost for the issuer takes the bonds. Pasadena plans to take bids from underwriters today (July 19) for $37 million of electric revenue bonds that fall in a double-A rating category. On Tuesday there will be a couple of competitive sales for general obligation bonds: the City of Berkeley plans a $16 million offering of G.O. debt (rated Aa2 and AA+) and the Sonoma Valley Healthcare District will sell $23 million of A1 rated G.O. bonds. On Wednesday the City of Gilroy plans to take bids on $23.5 million of G.O. bonds with an AA rating. The same day the El Dorado Union High School District is selling $17 million of G.O. bonds as well, rated AA-minus. The biggest competitive sale of the week occurs on Friday, when San Francisco P.U.C. takes bids on $67 million of tax-exempt water revenue bonds in the double-A rating category. The utility also is selling $387 million of taxable Build America Bonds. In negotiated sales, where the underwriting team is picked ahead of time, the Sacramento Municipal Utility District plans to sell $250 million of single-A electric revenue bonds. We aren’t sure how much will be sold as tax-exempt versus taxable BABs. Fitch Ratings recently changed SMUD’s rating outlook to “positive,” citing recent rate increases that will improve debt service coverage. The utility also lowered its variable-rate debt and improved liquidity, Fitch said. The Southern California Public Power Authority plans to sell a $53 million mix of tax-exempt and taxable revenue bonds for the Tieton hydropower project. The bonds are rated A1.
(July 16) -- Alameda Municipal Power (AMP) has received a two-notch upgrade to A+ from A-minus by Fitch Ratings as the utility gets ready to refinance all of its outstanding certificates of participation. The upgrade reflects AMP’s altered debt profile, including a modernized master indenture, and a “competitive power supply mix that already complies with the state's renewable portfolio standard,” Fitch said. The rating agency also cited a recent rate increase, “strong” financial projections, and other improved policies that include debt service coverage targets. Fitch also cited the decision by the Alameda utility to get out of a troubled telecom business, which featured cable television and Internet service. The Alameda Public Finance Authority plans to sell about $32 million of bonds for the refunding, though only about one-quarter of the deal will be tax-exempt.
(July 12) - New-issue activity will pick up a bit this week in California’s municipal bond market. The Metropolitan Water District of Southern California plans to price at least $80 million of revenue bonds rated triple-A by two rating agencies and Aa1 by Moody’s Investors Service. (On Friday the Laguna Beach Unified School District priced general obligation bonds with Aa1 and AAA ratings. The 10-year bond only yielded 2.79%.) The Los Angeles Community College District plans to price $175 million of tax-exempt general obligation bonds this week. Unfortunately, as we noted a couple weeks ago, the bigger chunk of the sale involves taxable Build America Bonds (almost $900 million). These bonds are rated double-A. A handful of smaller deals also should price this week.
(July 9) -Yesterday we noted (item below) that the Imperial Irrigation District received mixed grades from two rating agencies, with one upgrading and another downgrading a planned sale of electric system certificates of participation. Regardless, we believe it is an essential-purpose credit, even if the area the district serves is going through a harsh economic downturn. Later yesterday, however, we learned from an underwriter that the sale will be delayed for another reason. Apparently certain local entities that have unsuccessfully sued the district in the past have launched some sort of legal challenge to the COPs over an issue tied to water rights, not the electric system. The district is going to update its prospectus to mention the matter, and also file a response. Local media in late June reported that an attorney had written a letter of complaint to the bond counsel about the debt sale. We doubt the challenge has merit but issuers tend to err on the side of caution in disclosing litigation challenging a bond or COP issue. We don’t know yet how long the sale will be delayed.
(July 8) --We mentioned recently that the Imperial Irrigation District plans to sell electric system certificates of participation and revenue bonds in July. We also noted that Moody’s Investors Service had downgraded the district to A1 from Aa3. Standard & Poor’s has gone the other way, upgrading the district’s electric system revenue debt to AA-minus from A+. “The upgrade reflects our view of improved financial performance supported by financial policies that we believe should allow the district to retain its strong cash and debt service coverage margins,” S&P said. (As an aside, a good chunk of the COPs sale might be structured as taxable Build America Bonds.) In contrast to S&Ps action, Moody’s said high unemployment in Imperial County (28% in 2009) could be a drag on power consumption and related revenue for the utility at a time when the district is increasing its debt.
(July 1) -- Mendocino County’s taxable pension obligation bonds were downgraded to A from A+ by Fitch Ratings, which cited “multiple years of operating deficits.” The rural county doesn’t have much debt and most tax-exempt investors wouldn’t know much about this issuer. But there are a couple factors worth noting that say a lot about one problem in the public finance sector. First, while the county has sold pension bonds to help lower its unfunded pension liability, the pension liability has actually grown to $67 million. Fitch traced the increase to “retroactive increases in benefits” and the underfunding of the annual liability from 2004 to 2006. In additional, the county’s unfunded liability for other retirement benefits “is sizeable,” Fitch said, at $129 million. (This in a county with a 2009 population of 86,000.) The county has “no plans” to fully fund the liability, Fitch said. It is interesting to note that eight bargaining unions with the county have labor contracts expiring soon. You would think the county would take a hard line on raising the retirement age, requiring more employee contributions, etc., in an effort to improve its finances. After all, revenue coming to the county remains stagnant, and the state certainly isn’t in a position to help. How can the county continue to justify its current retirement plans and costs? No wonder Fitch’s rating outlook remains “negative.”
(June 30) -- The Imperial Irrigation District plans to sell more than $420 million of electric system certificates of participation and revenue bonds in July, marking one of the bigger sales now looming on our calendar. The lion’s share of the sale will entail revenue COPs. Such power utility bonds remain a solid bet and the Imperial Irrigation District essentially is a monopoly provider in its service area. In addition, rate-setting isn’t subject to regulatory approval, unlike the hoops private utilities face. Even so, Moody’s Investors Service decided to downgrade Imperial Irrigation District to A1 from Aa3. Moody’s said high unemployment in Imperial County (28% in 2009) could be a drag on power consumption and related revenue for the utility at a time when the district is increasing its debt. The rating outlook is “stable” at the A1 level.
(June 28) -- The City of Maywood’s recent decision to fire most of its employees, and contract out services to other governments, raises uncertainty about how it will handle various responsibilities in the future. The unusual action also is raising a red flag for its credit rating. Standard & Poor’s put the city’s Series 2008A lease-revenue bonds on a “watch list” for possible downgrade. The bonds, issued by the Maywood Public Finance Authority, are rated BBB now. Maywood is losing its general liability insurance coverage as of July 1 because of a large number of claims in the past, particularly against its police. The loss of that coverage, along with “questions” over how Maywood will deal with employee contracts, collective bargaining, etc., prompted the rating warning, S&P said. One of Maywood’s city councilman was recently quoted as saying bankruptcy wasn’t an option because the city has an insurance problem, not a cash-flow problem. In any event, the city’s action is strange to say the least. Maywood is located in southeast Los Angeles County.
(June 28) -- Fitch Ratings downgraded certain “municipal tobacco bonds” tied to a Fresno County securitization. The California County Tobacco Securitization Agency issued the Series 2006 bonds for the Fresno County Tobacco Asset Securitization Authority. The 2046A maturity was downgraded to BB from BBB; the 2046B maturity fell to B-plus from BBB-minus, and the 2055C maturity dropped to B-plus from BB. The outlooks on all three maturities changed to “negative” from “stable.“ The rating agency said the downgrades are based partly on “the level of stress each class is able to withstand as indicated by Fitch's breakeven cash flow model.” These so-called tobacco bonds are backed by payments for a 1998 settlement between major tobacco companies and most of the U.S. states.
(June 23) -- We usually don’t mention one-notch rating changes. However, the Ridgecrest Redevelopment Agency should get a mention for earning an upgrade during a tougher time for some tax-increment bonds. Moody’s Investors Service upgraded the agency’s tax allocation bonds to Baa1 from Baa2 ahead of a planned $33 million new issue. The upgrade “reflects the very large and diverse assessed valuation of the project area,” Moody’s said. Indeed, the redevelopment project area is almost 8,000 acres and covers more than half of the city. Assessed valuation in the project area rose by 2% in 2010, which is bucking the current trend for redevelopment agencies. “The rating is also driven by the conservative structure of the current issue, which includes issuing less than the maximum debt permitted by the additional bonds test, and a refunding that does not extend the term of the bonds,” Moody’s said. Smaller investors sometimes don’t realize that the “structuring” of the bond is very important. A “conservative” approach by an issuer can benefit investors, regardless of broader economic trends. Yield-hungry investors with a taste for lower credit ratings should take a gander at this offering. Rural Ridgecrest, well east of Bakersfield, also benefits from the presence of the China Lake Naval Air Weapons Station.
(June 18) -- Yesterday we said Moody's Investors Service might upgrade one class of State of California general obligation bonds, those that finance home purchase loans for military veterans. S&P and Fitch have beaten Moody's to the punch. S&P raised the veterans bonds to AA from AA-minus and Fitch to AA-minus from A-minus. A new law creates "a special, segregated fund within the state's general fund, to be known as the veterans' bonds payment fund," S&P noted. According to Fitch, "this fund currently eliminates the risk that the veterans GO debt service funds could be used by the State for other purposes." The state plans to sell $157 million of Veterans G.O. bonds next week. They are rated A1 now by Moody's. This debt is called "self-liquidating" because loan repayments by veterans, not taxpayer funds, pay off the bonds. However, California's full faith and credit also backs the debt if needed.
(June 17) -- Moody's Investors Service said it might upgrade one class of State of California general obligation bonds, those that finance home purchase loans for military veterans, because of a new law that improves the backing for the debt. The legislation "is likely to strengthen the security on the bonds by separating the flow of funds from the state General Fund," Moody's said. The state plans to sell $157 million of Veterans G.O. bonds next week. They are rated A1 now. This debt is called "self-liquidating" because loan repayments by veterans, not taxpayer funds, pay off the bonds. However, California's full faith and credit also backs the debt if needed.
(June 17) -- Standard & Poor's downgraded City of Stockton lease revenue and pension obligation bonds by one notch, to A-minus from A, because of its well-publicized budget problems. The downgrade also applies to certificates of participation. S&P cited "stress on the city's financial position that we expect will continue through fiscal 2011 due to adverse economic conditions that have affected tax revenues, as well as the city's difficulty in achieving agreements with its public safety bargaining units to reduce expenditures." The rating outlook is "stable" because Stockton has taken enough "decisive" action to adjust to lower revenue, S&P said.
(June 15) -- Standard & Poor's has changed its "CreditWatch" on Pajaro Valley Water Management Agency 1999A certificates of participation to "developing," meaning the rating might to up or down. The rating had been on a "negative" downgrade watch from S&P. The "developing" view reflects the possibility that a "new charge, if approved, would yield about $9.8 million in revenue and replace the current augmentation charge, the agency's primary source of revenue," S&P said. In February S&P lowered the "underlying" COPs rating to BB from BBB, citing a judgment that requires the agency to refund increased "groundwater augmentation charges" going back as far as 2003. The agency is pursuing a new augmentation charge that meets Proposition 218 requirements for raising revenue. Ballots for that new charge will be mailed this week and must be returned by August 10. The rating could rise if the charge is approved, S&P said. Ambac insured the COPs. For more on Ambac see our June 15 entry on this page. The COPs due in 2024 traded yesterday at about 87 cents on the dollar, for a tax-exempt yield above 7%.
(June 10) -- Palo Alto has priced its triple-A G.O. bonds, but a new AAA sale is looming from the City of Sunnyvale. Standard & Poor's rates the Sunnyvale water revenue bonds triple-A. The Palo Alto deal yielded 3.16% in 11 years and 3.86% in 19 years.
(June 9) -- Standard & Poor's Ratings downgraded Pomona Valley Hospital Medical Center to BBB- from BBB, citing "declining revenues, soft volumes, and operating losses." The California Health Facilities Financing Authority issued the debt. This is an underlying rating because the bonds are insured (by MBIA's successor, we believe). "Continued operating losses would likely result in a lower rating," S&P said. S&P also lowered its rating to A- from A on Children's Hospital and Research Center Oakland. The Association of Bay Area Governments Finance Authority For Nonprofit Corps. issued the revenue bonds." The lowered rating reflects our view of Children's persistent operating losses," S&P said. "The lowered rating also reflects Children's longer-term history of volatile operating performance, weak coverage levels, and a challenging payer mix. Should management realize its goal of break-even performance in fiscal 2011, a positive rating action is possible."
(June 7) -- The Valley Health System's plan to pay off its existing municipal debt in full under a bankruptcy plan to sell its hospitals still should close this summer. (Voters approved the plan months ago.) Even so, Standard & Poor's the other day downgraded the debt to single-D from single-C because of a payment default pending the sale. Fitch Ratings previously lowered VHS debt to single-D. Just remember, these ratings don't reflect the fact the system's debt will get paid off soon.
(June 4) -- We mentioned below that the Guam Power Authority is selling tax-exempt bonds soon. Fitch Ratings has now upgraded the issuer to BBB-minus from BB+, citing improvement in "cost recovery mechanisms" and recent generating unit performance. We like the Guam authority for the same reason we like Puerto Rico's power provider: Both have monopoly-like positions for an essential service. Guam Power "benefits from its position as the sole provider of retail electricity" on the island, Fitch noted. Even so, its financial cushions have been rather thin, which has kept its credit rating low.
(June 3) -- The Guam Power Authority can sell bonds that are tax-exempt from state and federal income taxes across the U.S. California residents seeking higher yield will like the authority's planned sale of $235 million in bonds. Standard & Poor's just upgraded the authority to BBB, citing operational improvements among other things. The other rating agencies have it a notch below investment-grade, though they haven't rated this deal yet.
(June 1) -- San Bernardino County's housing market has taken a terrible hit from the recession. The doom-and-gloom media will be disappointed, then, that the county's certificates of participation and pension obligation bonds were upgraded last week to AA-minus from A+. "We believe the county's stable financial performance, which by key indicators was impervious to the stress test provided by the contraction, reveals the robustness of the county's credit strength," Standard & Poor's said regarding the upgrade. "In addition, during the past fiscal year, the county significantly reduced its counterparty exposure by voluntarily terminating its interest-rate swaps that it had previously entered to hedge its 1998 variable-rate debt, which during 2009 the county refunded into a fixed-rate obligation." This upgrade won't get noted in most current media stories about public finance because it conflicts with the doom-and-gloom scenarios that are being passed off as business journalism.
(May 27) -- The Securities and Exchange Commission has approved some changes meant to improve municipal bond disclosure. Beginning December 1, municipal "event" notices now required under continuing disclosure must be disclosed no longer than 10 business days after the event. This replaces a more vague "in a timely manner" standard now in use. A few other changes are supposed to improve the type of information provided. Our May print edition talked about broader SEC reforms under discussion; those are still on the table but will take longer to implement.
(May 26) -- The Northern California Power Agency votes tomorrow to sell up to $450 million of revenue bonds to finance the Lodi Energy Center, a 280-megawatt gas-fired energy plant. A dozen entities, led by Santa Clara and Lodi, make up one group backing $275 million of the bonds. S&P rates the bonds A-minus. Some of the debt will be taxable Build America Bonds. Another $175 million of bonds will be backed by the California Department of Water Resources under the indenture.
(May 24) -- The Tamalpais Union High School District in Marin County is getting ready to sell $50 million of general obligation bonds. They are rated AAA by Standard & Poor's, which is why we mention the sale.
(May 20) -- Moody's Investors Service downgraded the Modesto Irrigation District to A2 from A1 as the issuer gets ready to sell $100 million of electric system revenue bonds. The downgrade and a "negative" outlook also affects $624 million of existing certificates of participation. In March 2009 Moody's raised the COPs to A1, a move that incorporated planned electric rate increases. However, that rate action didn't occur as expected. "Not implementing this rate action on the proposed timelines is a key driver for the downgrade," Moody's said. "The financial profile of MID is expected to remain weak in the short term as a result of continued economic weakness including nearly a 20% unemployment rate within its service area. The negative outlook reflects this weakness, as well as the possibility of future rate rises not being implemented on proposed timelines." The utility's strengths include a "dominant market position" in providing electricity to more than 100,000 retail customers, Moody's added.
(May 18) -- Fitch Ratings the other day lowered its "underlying" ratings on outstanding Foothill/Eastern Transportation Corridor Agency toll road refunding revenue bonds (Series 1999 and 1995A) to BBB-minus from BBB. The recession has hit traffic, lowering it to fiscal 2004 levels. The downturn also has hurt housing growth in Orange and Riverside Counties. The outlook is "stable." Separately, Fitch affirmed its BB rating on the San Joaquin Hills Transportation Corridor Agency toll road refunding revenue bonds (Series 1997A and 1993). However, the outlook is now "negative" instead of "stable." The outlook "reflects the declines in the facility's economic rate-making flexibility as evidenced by decreasing revenues despite recent toll increases," Fitch said. "The weakened economics of the service area create uncertainty as to the facility's ability to continue to grow revenues and provide financial flexibility in the face of increasing debt service obligations."
(May 13) -- Strong operating margins and a good balance sheet prompted Moody's Investors Service to upgrade Stanford Hospital & Clinics to Aa3 from A1. The hospital will soon sell $314 million of revenue bonds through the California Health Facilities Financing Authority. It doesn't hurt that the hospital has good ties to triple-A Stanford University.
(May 12) -- We aren't sure how one distinguishes between a single-B rating and a lower B-minus rating, but Mendocino Coast Health Care District general obligation bonds have been cut a notch to the B-minus level. This "underlying" rating "reflects our view of the district's weaker financial results through the first nine months of fiscal 2010 and balance sheet erosion, due to last year's refinancing and this year's 2010 issuance," Standard & Poor's said. The 2000 G.O. bonds were guaranteed by FGIC. A 2030 maturity traded last month at about 68 cents on the dollar. The district operates a 25-bed hospital in Fort Bragg. Certain of the district's revenue bonds are state-insured and carry A-minus ratings.
(May 11) -- Our weekly wrap-up on Friday was out before a Saugus-Hart School Facilities authority priced lease revenue bonds that yielded 4.10% in 10 years ... and they included AG Municipal bond insurance. The Marin Municipal Water District a day earlier priced AA+ water revenue bonds that yielded a tax-exempt 3.06% in 10 years.
(May 6) -- Channing House, a continuing care retirement community in Palo Alto, continues to benefit from an "excellent business position" and improved financial results, according to Standard & Poor's. Nevertheless, S&P lowered bonds sold by the Association of Bay Area Governments for the nonprofit to BB from BBB-minus. The reason? Capital improvement plans that will triple the debt load and "significantly stress" the balance sheet for Channing House, S&P said.
(May 5) -- The Palm Drive Health Care District has priced $11 million of certificates of participation, a deal we mentioned recently as part of a bankruptcy exit plan. It appears the COPs yield roughly 7.4% in 15 years and around 7.8% in 25 years, though they weren't reoffered. High-yield bond funds would be among the potential buyers. Standard & Poor's rates the COPs double-B, a couple notches below investment grade.
(May 4) -- Conduit municipal bonds backed by two airlines might see rating changes depending on how a Continental - United (UAL) merger plays out. Yesterday, for example, Series 1999 Los Angeles Regional Airport Improvement Corp. facilities sublease revenue bonds for Continental were put on a "negative" watchlist for possible downgrade by Standard & Poor's. These bonds are rated single-B based on Continental's credit rating. "We could most likely lower our corporate credit rating on Continental to 'B-', if the merger is completed and we believe that the combined credit profile, including UAL, is materially weaker than the current one," S&P said. "Alternatively, we could affirm the existing 'B' corporate credit rating if we feel that the opportunities balance or outweigh merger risks." Meanwhile, S&P put United on a "positive" watch for upgrade because it is rated 'B-' already.
(May 3) -- Sales of new municipal bonds in April dropped to the lowest monthly level since early 2009, Thomson Reuters statistics show. This trend continues to put a lid on tax-exempt yields.
(Apr. 29) -- Plans for more airline consolidation will present new challenges for certain airports, Fitch Ratings noted in a report. "Fitch sees small market airports as well as domestic connecting hubs at the higher level of the risk spectrum for utilization changes with some benefiting from expansion while others losing some if not most connecting operations." For example, smaller airports could see credit ratings pressured if two dominant carriers merged, Fitch said. Airports with a lot of origination and destination traffic would see less impact, especially if they don't face competition from nearby airports, Fitch added.
(Apr. 27) -- Moody's Investors Services downgraded certain Hesperia Redevelopment Agency tax allocation bonds to Ba1 from Baa2. The action affects Series 2005B, 2007A, and 2007B. "The project areas have suffered significant reductions in assessed values (AV) brought upon by the collapse of residential property values," Moody's said. Series 2005A TABs dropped one notch, to Baa3 from Baa2. The agency can point to a positive in case assessed value drops a bit more: "unrestricted cash and investments of $41.2 million," Moody's noted. Our Apirl print edition discussed redevelopment agency bonds.
(Apr. 23) -- As we expected, long-standing budget problems prompted S&P to downgrade South Gate taxable pension obligation bonds to BB- from BBB-. "The downgrade reflects our opinion of the continuation of operating deficits that have characterized the city's financial management for at least the past decade," S&P said. The city has lost a lot of industrial and manufacturing jobs over the years, hurting the city's revenue. The pension bonds are backed by city revenue "from any available source," S&P noted. Ambac provided bond insurance on the deal.
(Apr. 21) -- The rating on South Gate pension obligation bonds dropped to BB- from BBB-, a three-notch cut, according to Standard & Poor's. We haven't seen the reason yet, though budget crunches tend to be the usual suspect.
(Apr. 20) -- The "underlying" rating on home mortgage revenue bonds issued by the California Housing Finance Agency was cut to A3 from Aa3 by Moody's Investors Service. The rating agency cited several factors, including the severe deterioration of California housing markets, significant increases in delinquencies and foreclosures of bond-related loans. There are still positive factors supporting the bonds, including mortgage insurance on the loans. The agency "can continue to meet it obligations to pay debt service under a variety of stressful scenarios," Moody's said, though the rating remains on a watch list for potential downgrade.
(Apr. 19) -- On Friday Fitch Ratings downgraded Los Angeles general obligation bonds to A+ from AA-. Other city obligations, such as lease securities, also fell by one notch. The city's lowering of budget reserves, along with political in-fighting over a current deficit, prompted the downgrade, Fitch said. The city's diverse economy and moderate debt levels continue to be credit positives, Fitch added. Moody's Investors Service downgraded Los Angeles G.O. bonds to Aa3 earlier in April and S&P recently issued a rating warning to Los Angeles. Why do we say "temporarily" in the headline? On April 30 Fitch plans to "recalibrate" the city's credit rating to a "global" scale. At that time the Los Angeles G.O. rating will rise to AA- again and certain other debt will go up by a notch. If not for this downgrade, the G.O. bonds would have been AA after recalibration. Strange stuff, but there you have it. Moody's "recalibration" also is now taking effect and new ratings will be
(Apr. 15) -- This is a rating warning we don't see everyday. The Peralta Community College District apparently has faced technology-related problems and turnover of key finance personnel, and that in turn is delaying passage of a budget, according to Standard & Poor's. "We are concerned about the district's appropriation-related debt in the absence of an adopted budget," S&P said in putting the district on a warning list for potential downgrade. The district can ease S&P's concern by passing a budget for the current fiscal year and action on this passage might occur on April 27. The district has told S&P that it will make its next appropriation-related debt service payment on May 1. This is one of those situations where we expect the issuer will do the right thing and certainly avoid a missed debt payment, if not a downgrade as well. Bondholders should sit tight.
(Apr. 12) -- California Treasurer Bill Lockyer recently sent a letter to a few underwriters who are involved in the credit-default swap market that stretches to include municipal bonds (see March 31 item below). Our April print edition helped Wall Street respond by sniffing out some hypocrisy based on the state's own past actions. Didn't California in the past take yield out of smaller investors' pockets by going along with the fiction that bond insurance was needed on California G.O. bonds? That was okay as long as the state profited from it at the expense of smaller investors? We have some more to say about the way politicians play both sides of the fence in Sacramento, especially in regard to taking money from public unions, but you can read April's edition to see our take on it.
(Apr. 9) -- The Coachella Water Authority adopted a 40% rate increase effective April 1 and another 11% hike effective Jan. 1, 2011. That prompted Standard & Poor's to change its outlook on the authority to "stable" from "negative." S&P's underlying rating on the authority's insured bonds is BBB. The rate increase helps offset recent declines in connection-fee revenue. We mention this outlook change only because management's willingness to raise rates is one reason water and sewer bonds can do well even in tough times, as our April 9 entry on the Research page explains.
(Apr. 8) -- A day after Moody's downgraded Los Angeles bonds (see our April 7 entry on the Research page), Standard & Poor's put the city on a warning list for possible downgrade. "The CreditWatch action reflects our assessment of the city's inability to identify cash resources needed to balance the remaining budget gap for fiscal 2010 in light of an estimated $73 million cash shortfall announced by the city controller's office on April 5," S&P said. The rating agency noted that a dispute between the city and its water and power utility over a reduced revenue transfer is a factor in the downgrade warning. S&P rates Los Angeles G.O. bonds AA- and appropriation-backed bonds A+.
(Apr. 7) -- City of Industry sales tax revenue bonds were cut to A- from A+ by Standard & Poor's, just as the city sells a batch of this debt on a taxable basis. The economic downturn and weakened auto sales have led to sales tax revenue declines of more than 16% for the city, S&P said. The bonds still benefit from decent financial cushions and the city will do well as the economy rebounds. City of Pittsburg Redevelopment Agency subordinate-lien tax allocation bonds were cut to BBB from A- by S&P, with lower assessed valuation being the usual suspect. There is also "concentration" in the two top taxpayers for the Los Medanos project areas, S&P added. We discuss redevelopment bonds in our April print edition. The Pittsburg agency has special reserves to help offset any more assessed value declines and the S&P outlook is "stable."
(Apr. 6) -- Moody's Investors Service downgraded San Joaquin County certificates of participation to A3 from A2. While the county's low debt level is a plus, the county's assessed value of its tax base is low for the rating level, Moody's said. The Central Valley county also is vulnerable to economic swings, the same problem affecting the City of Stockton, the county seat. The county's issuer credit rating, a proxy of sorts for G.O. bonds, fell to A1 from Aa3. Since Moody's plans soon to recalibrate municipal bonds ratings to a "global" scale, it is possible these ratings will go back to the pre-downgrade level (recalibration might raise these COPs by one notch). However, since other counties also will rise under recalibration, San Joaquin County still has lost a little ground relative to other issuers.
(Apr. 1) -- Standard & Poor's has issued a correction for its rating on Hesperia Redevelopment Agency Series 2005A tax allocation bonds. The downgrade we noted below on March 16 should have been only one notch, to BBB-. S&P said that, due to an error, it had listed the downgraded rating as BB. The outlook at BBB- is still "stable."
(Mar. 31) -- The other day California Treasurer Bill Lockyer sent a letter to a few underwriters who are involved in the credit-default swap market that stretches to include municipal bonds. These credit default instruments are used by big investors to hedge their risk, and for several years they have been used to protect against a California default. Treasurer Lockyer's letter makes a point we have made several times: the actual risk of default for the state remains incredibly, incredibly low. However, trading in these swaps indicates that some see California default risk as higher than that for Croatian and Kazakhstan debt, Lockyer noted. Since the people the treasurer is writing to also get fees for helping sell California bonds, Lockyer said taxpayers "have a right" to know the level of these firms' participation in the credit-default market. We are as eager as the treasurer to see the underwriters' responses. The issue isn't whether they can make a market in these swaps, but rather the strange risk premium for California debt vis-a-vis other "sovereign" credits.
(Mar. 30) -- A 9.6% drop in assessed valuation in the Lancaster Redevelopment Agency central business district prompted Standard & Poor's to downgrade tax allocation bonds for that district to BB from BB+. However, a "stable outlook reflects our expectation that the agency will continue to make necessary transfers from other project areas to cover annual debt service on the bonds despite a lack of debt service coverage by pledged revenues generated within the project area," S&P said. Keep your Lancaster TAB issues straight. Some Lancaster Financing Authority TAB underlying ratings were also lowered by S&P, but only to BBB+ from A-minus.
(Mar. 29) -- This week will see sales from the State Public Works Board and the University of California Regents. A double-A harbor revenue bond sale by Long Beach will set a yield benchmark for higher-quality debt. Childrens Hospital Los Angeles plans a triple-B sale soon that will offer some yield premium.
(Mar. 26) -- San Diego soon plans to sell sewer revenue bonds with single-A ratings. The city was shut out of the debt markets for a few years over its past accounting problems, but the creditworthiness of this revenue bond isn't a concern. "The improved finances are primarily attributable to sizable and necessary rate increases which reflect the city's renewed commitment to financial health throughout its operations," Moody's Investors Service said. "The fundamental strength of the enterprise remains a key credit factor, including its essentiality and its large, strong, and diverse service area, which provides a relatively high degree of revenue stability."
(Mar. 23) -- For quality-conscious investors, a triple-A Stanford University tax-exempt bond sale is imminent through the California Educational Facilities Authority. We haven't heard that it priced yet.
(Mar. 22) -- Standard & Poor's last week raised its rating and "underlying" rating to BBB from B on the $10.8 million Vallejo Public Financing Authority Series 2003A local agency revenue bonds. The debt was issued for Vallejo-Glen Cove Community Assessment District No. 61. S&P noted that, "despite the city's current Chapter 9 bankruptcy status, pledged assessment revenues securing the bonds have been deemed restricted for debt service by the courts, with all historical debt service payments being made in a full and timely manner." Someone might wonder S&P just made the upgrade now when these bonds remained protected all along, unless it was spurred by a recent bond trustee's update. In any event the Bond Advisor recently talked about Vallejo here.
(Mar. 17) -- Sometimes we might not mention a one-notch rating downgrade, but we mention the cut to single-A from A+ because the East Side Union High School District plans to sell $100 million of general obligation bonds on March 24. Standard & Poor's also assigned a "negative" outlook while it waits to see if the district, located in San Jose, can avoid future budget gaps. "The lowered ratings reflect our view of the district's uneven financial performance, as evidenced by wide fluctuations in reserve balances, as well as its projected deficits through fiscal 2012 that it projects will result in a reduction of unrestricted reserves to 1.5% by the end of fiscal 2011 and deficit reserves by fiscal 2012," S&P said in a report.
(Mar. 17) -- Our February 19 entry in this column mentioned that S&P downgraded City of Stockton wastewater certificates of participation to BBB+ from single-A because or revenue declines. Moody's now says it might lower its A2 rating on Stockton's 1998 and 2003 wastewater enterprise COPs. "This action reflects the enterprise's violation of its debt service coverage covenant, significantly diminished fiscal reserves, and the pressing need to enact significant rate increases to preserve the funds currently being used to make debt service payments," Moody's said in a report. The wastewater enterprise has reserves to meet payments through fiscal 2012, providing time to put rate increases in place. We would urge Stockton to address this situation to avoid multinotch downgrades (some COPs had bond insurance).
(Mar. 16) -- [UPDATE: On March 31 S&P issued a correction and said the rating is only cut one notch, to BBB-. See the Apr. 1 item above for S&P's correction.] The $40.5 million Hesperia Redevelopment Agency 2005A tax allocation bonds were downgraded to BB from BBB, a three-notch cut, by Standard & Poor's. Given other S&P redevelopment downgrades in recent days, lower assessed valuation is no doubt the culprit. The outlook is "stable" at the double-B level. Don't confuse "credit" risk and "default" risk or you will be a panic seller. Another $9 million of Hesperia 2005B tax allocation bonds for housing fell to BBB- from BBB+ after S&P cut that rating by two notches.
(Mar. 15) -- In case you missed it in our weekly review, we flagged several new bond issues expected to price in coming days. California State University plans to sell systemwide revenue bonds rated Aa3 and A+. We also anticipate several other deals that have been on our calendar for awhile to price this week. They include a University of California issue through the state's infrastructure bank; a Contra Costa Community College G.O.; a San Francisco Airport Commission transaction; a Burbank electric revenue bond, and a few other smaller deals as well. According to an advertisement, the East Side Union High School District plans to take bids from underwriters for $100 million general obligation bonds on March 24.
(Mar. 15) -- The Fremont-Rideout Health Group, located about 40 miles north of Sacramento and an operator of two hospitals among other facilities, was downgraded by Moody's Investors Service the other day to A2 from A1. Earlier this month S&P downgraded the rating to A from A+. Recent weaker operating performance prompted the downgrades of tax-exempt bonds backed by the health group. The financial results looked a bit better without a one-time legal settlement recorded in fiscal 2009, Moody's said. Bonds for the health group were issued by the City of Marysville and the California Statewide Communities Development Authority, and included Ambac insurance. The health group plans to sell new bonds over the next couple years for capital needs.
(Mar. 12) -- A four-notch downgrade late yesterday of Riverbank Redevelopment Agency tax allocation bonds (Series 2007A and 2007B) is no doubt going to be for the same reason we have mentioned some other recent multi-notch downgrades: lower assessed valuations are finally showing up after the real estate downturn, in turn reducing tax-increment revenue. Standard & Poor's lowered the Riverbank bonds to BB-minus from BBB. While many bigger and diversified redevelopment agencies won't see such hits, this probably isn't the last of such adjustments for some smaller project areas as assessed valuations near a "bottom" and then lag a real estate upturn. We saw this pattern in the early 1990s, too, though this time around we might see a bit more on the downgrade front.
(Mar. 11) -- The six-notch downgrade we mentioned earlier today of the Desert Hot Springs tax allocation bonds (see item below) was in fact for the reason we suspected: "significant" assessed value declines, according to Standard & Poor's. These declines reduce the tax increment revenue that is pledged to the bonds. The merged project area for the Series 2006 and Series 2008 TABs was projected by the city's redevelopment agency to have assessed value declines of 5.2% in 2010. However, the actual decline in fiscal 2010 was more than 30%, S&P said. According to the agency's tax consultant, a 5% drop is possible next year, though a recent increase in property sales might to help offset the decline and signal the start of a slow rebound. S&P has a "stable" outlook at the BB level because future assessed value declines will be smaller and a fully-funded debt reserve fund provides a backstop if needed in future years. Assessed value declines also caused the less-drastic downgrade of the agency's housing TABs, S&P said. As we note below, beware of dumping the bonds in a panic right after such bad news. A sharp downgrade is never welcome, but it doesn't mean you won't get your principal back.
(Mar. 11) -- [Also see update above.] Some Desert Hot Springs Redevelopment Agency tax allocation bonds have been downgraded six notches, to BB from A, by Standard & Poor's. If this type of rating cut sounds familiar, just scroll down to our March 8 entry about Hercules. Be careful because some Desert Hot Springs housing tax allocation bonds were only downgraded to BBB+ from A. We haven't seen a report on the downgrade yet but usually it involves lower assessed valuation due to the real estate downturn and recession. We will update those details soon. The six-notch downgrade applies to $15.9 million 2008A-2 TABs (Merged Redevelopment Project) and $18.915 million 2008A-1 taxable TABs. The new BB rating also applied to $7.025 million 2006 refunding TABs. The S&P outlook is now "stable" and as always we warn investors about "panic selling" at this point, you'll get roughed up in the secondary market.
(Mar. 10) -- The Sacramento Regional County Sanitation district's $1.07 billion of senior-lien debt was downgraded to A1 from Aa3 by Moody's Investors Service. Weak financial results tied to the recession and housing downturn prompted the downgrade, Moody's said, and the outlook is "negative." The district's $369 million of unrestricted cash at the end of fiscal 2009 is a strength, and its long-term prospects remain sound. The rating could still face pressure, though, because the district expects to lower reserves in the near future. It will raise rates, too, but only enough to make sure it meets debt service covenant levels, according to Moody's.
(Mar. 8) -- Regarding the downgrade of the two Hercules tax allocation bonds discussed below, a fuller S&P report includes a paragraph worth noting: "Agency management stated that it would use cash on hand in order to meet debt requirements that were not met with tax increment revenue. While not specifically pledged to the bonds, this cash provides the agency with flexibility. At the end of fiscal 2009, the agency had $6 million in cash and investments." This information should give bondholders added reassurance that the city will take steps to deal with the situation discussed below.
(Mar. 7) -- [Also see March 8 update above.] We noticed late Friday that Standard & Poor's downgraded about $117 million of City of Hercules Redevelopment Agency tax allocation bonds to BB, or below investment grade, from single-A. In our March print edition we discussed why some rating changes are more noteworthy than others; a six-notch downgrade certainly gets our attention as noteworthy. The six-notch downgrade applies to the city's Series 2005 and Series 2007A tax allocation bonds (Hercules Merged Project Area). "The rating actions reflect our view of the decline in the agency's tax increment revenues due to a significant drop in assessed value in the agency's project area," S&P said, which in turn reduced debt service coverage for the bonds. The redevelopment agency's 2009 annual report shows projected debt service coverage dipping just below 1.0 times through fiscal 2013 before steadily rising again in future years. The same report says tax increment revenue dropped to $12.8 million in fiscal 2009 from $13.5 million a year earlier. This is a risk for redevelopment bonds during a real estate downturn because tax valuations can decline. However, the magnitude of the Hercules downgrade is still unusual. We would be cautious about panic selling because an actual interruption of bond payments is highly unlikely. Hercules, located northeast of San Francisco on San Pablo Bay, still has a prime location when the economy rebounds. A double-B muni rating isn't as dire at times as a similar corporate rating. These two deals were guaranteed by Ambac, which remains among the hardest-hit of the former triple-A bond insurers.
(Mar. 5) -- Do we really need more examples of why California has the lowest credit rating among U.S. states? Probably not, but this new example is good to ponder in seeking as much yield as possible on next week's state G.O. sale. Yesterday our lawmakers passed a bill to free up about $1 billion of gas tax money for closing a projected $20 billion deficit. However, according to media reports, lawmakers will defer other difficult choices on the budget gap until late this spring and summer in the hope state revenue will keep beating current projections. First of all, there is no way the state is "growing" its way out of this budget mess by the summer. Second of all, this "budgeting" approach, if you can call it that, is what has gotten California into such messes for almost two decades. Lawmakers simply refuse to deal with a "structural" budget imbalance and that is why we can't escape chronic budget deficits. This is how a triple-B municipal bond credit functions, and the rating level is very appropriate, even if the risk of a default is remote (again, refer to our March print edition).
(Mar. 4) -- Hayward Unified School District general obligation bonds were lowered one notch to A+ from AA- by Standard and Poor's. Several years of declining attendance and recent fiscal stress prompted the change, S&P said. However, a "stable outlook reflects our assessment of the district's budget reduction plan to stabilize unrestricted general fund reserves at roughly 3% for fiscal [years] 2010 and 2011," the rating agency added. (On the good news front today, S&P upgraded Mendocino Unified School District G.O. bonds to AA-minus from A+.)
(Mar. 2) -- Last week we mentioned that a $13 million Rohnert Park sewer system certificate of participation, dated June 8, 2005, had been downgraded to BBB from A- by Standard and Poor's, but we didn't see a reason. A new S&P report late yesterday confirmed our suspicion that a 2008 voter decision to reduce sewer rates to 2006 levels is still causing problems. "The downgrade reflects our view of the continued deficit position of the sewer enterprise, the city's $6 million current cash position that is being drawn down about $1 million per quarter to support debt payments and operations and maintenance, and the city's need to raise rates substantially in an environment where ratepayer resistance has been evident," S&P said in the report. The outlook is "negative," and reflects S&P's "opinion of the challenges associated with restoring rates to where they were prior to the rollback, and what we consider a clear resistance among ratepayers to such increases. If the system is unable to meet its revenue requirements, namely adequate coverage of ongoing fixed charges by recurring revenues, we would likely downgrade the sewer system's credit further." The Bond Advisor believes this is an "underlying" rating because a financial guarantee also exists for the COPs. We also noted in one of our print editions awhile back that voter "rebellions" can cause problems at times, even for traditionally safer utility debt. Such rate rollbacks are not common but they can lead to downgrades when they occur. We would urge the city to do all it can to address this issue.
(Mar. 1) -- The City of Inglewood's 1991 certificates of participation were upgraded to BBB+ from BBB- by Standard & Poor's after the city caught up on releasing audited financial statements. Inglewood" has recently posted what we consider good operating results," including "strong" levels of unreserved general fund balances, S&P said.
(Mar. 1) -- Tax-exempt bond sales across the U.S. dropped by about 25.7%, or almost $6 billion, last month over February 2009, according to Thomson Reuters. The culprit? Taxable Build America Bonds contributed $7 billion of new-issue volume to the overall taxable muni volume in February, no doubt taking away from some tax-exempt issuance. As a result, total new-issue muni bond volume actually grew last month by about 7% over the same year-earlier period. Taxable BABs accounted for more than one-quarter of new issues last month by dollar volume. This trend continues to have implications for the level of tax-exempt yields, helping to keep a "lid" on them absent other general interest-rate increases.
(Feb. 25) -- A $13 million Rohnert Park sewer system COP, dated June 8, 2005, has been downgraded to BBB from A- by Standard and Poor's. The outlook is "negative." We haven't seen the reason yet, though a 2008 voter decision to reduce sewer rates to 2006 levels prompted a one-notch downgrade by S&P last year. Perhaps the rate rollback is still causing problems. We believe this is an "underlying" rating because of a financial guarantee.
(Feb. 25) -- The Sierra Kings Health Care District's general obligation bonds have been confirmed at a Ba2 rating level and removed from a "Watchlist" for potential downgrade, according to Moody's Investors Service. The district made its full debt service payment this month on the G.O. bonds. This payment shows "the ongoing willingness and ability" of the district to pay the G.O. debt service despite its bankruptcy filing last October, Moody's said. Fresno County also will keep levying and collecting the property taxes that provide the security for the bonds, Moody's said, adding that it is a "remote possibility" a bankruptcy judge would temporarily stop the county from doing so. Moody's has noted previously that the health care district's G.O. obligation would live on, even if the local hospital ceased operating.
(Feb. 23) -- Los Angeles general obligation bonds were downgraded a notch to AA- from AA by Standard & Poor's, mirroring a similar move by Fitch Ratings in November. Various other Los Angeles ratings that were AA- have dropped to A+ (judgment obligation bonds, certificates of participation, lease revenue bonds, etc.). S&P cited "the overly slow approval of necessary budget-cutting measures in response to dramatically lower revenues and the resulting depletion of general fund reserves" as reasons for the downgrade. S&P assigned the debt a "stable" outlook because the city is cutting "thousands of positions" to align spending with actual revenue.
(Feb. 22) -- The Palmdale Water District has been taken off a list for a potential downgrade by Standard & Poor's. The underlying rating on its certificates of participation was affirmed at BBB with a "stable" outlook. Rate increases adopted last year helped replenish cash reserves and ensured a financial cushion promised to investors, S&P said. Fitch Ratings downgraded the district in November to single-A from A+.
(Feb. 19) -- The City of Stockton has had certain certificates of participation secured by net revenues of its wastewater enterprise downgraded to BBB+ from A by Standard & Poor's. The outlook is now "negative" instead of "stable." The downgrade "reflects our assessment of Stockton's sharp decline in net revenues in fiscal 2009," S&P said in a statement. "We believe that net revenues are unlikely to improve materially in fiscal 2010, and that the declines are partially associated with the city's assumption of operating responsibility from a private operator. Management indicates that state law and other constraints make beneficial rate adjustments unlikely until at least August 2010." S&P said the city must work on restoring "structural stability" to the wastewater system's financial position or risk having the credit rating drop below investment grade. The COPs are tied to a wastewater system project. However, at least one of Stockton's wastewater COPs ($101.65 million 1998A) is still single-A but with a "developing" instead of "positive" outlook, according to S&P. We are guessing this rating is based on bond insurance and will have to check.
(Feb. 19) -- We didn't mention it yesterday, but Fitch Ratings added to Sacramento County's downgrade list by cutting its COPs ratings to A- from A. The outlook is "negative," the same as those from S&P and Moody's (see Feb. 17 entry below). County officials might want to ponder three downgrades over a couple days and realize they need to do some serious budget work.
(Feb. 18) -- We usually don't mention rating agency outlook changes or even one-notch upgrades and downgrades, but we do make exceptions for "larger" bond issuers. Yesterday we noticed the Moody's Investors Service outlook change to "negative" from "stable" for the City of Los Angeles. All we can say is, it's not surprising. Fitch Ratings in November downgraded Los Angeles over its budget shortfall, and Moody's noted that the city needs to take more decisive action on money-saving proposals (such as cutting 1,000 jobs before July). Moody's also warned about pursuing one-time fixes instead of structural changes that produce real long-term savings. Bond Advisor footnote: The State of California, of course, is a great poster child for issuers that favor gimmicks over real budget action. If you want to get triple-B credit ratings, our state is the bad role model. Los Angeles won't sink to that level.
(Feb. 17) -- Sacramento County was downgraded one notch by Standard & Poor's and Moody's Investors Service prior to an upcoming $129 million certificate of participation sale. A "structurally imbalanced" budget and "weak" reserve levels prompted the cut to A-minus from A on the county's COPs and pension obligation bonds, S&P said. In some instances this downgrade applies to "underlying" ratings because of bond insurance. The rating agency also changed its outlook to "negative" from "stable" while it waits to see if the county can take "substantial" action to address a projected deficit in fiscal 2011. The county has "adequate sources of liquidity" for the near-term challenges, S&P added. The county's "issuer credit rating," a proxy for a G.O. pledge, dropped to A from A+. In the new-issue market COPs are generally a tougher sell when local governments face budget gaps and a lower rating will generate higher yields. [FEB. 17 UPDATE: Moody's Investors Service also downgraded the county, with the COPs going to Baa2 from Baa3. The issuer rating fell to A3 from A2 and the pension bonds to Baa1 from A3. Moody's cited similar budget concern and also kept its outlook at "negative."]
(Feb. 16) -- Assured Guaranty Municipal (the old "FSA" bond insurer) is restricting its business to municipal bonds, going back to the model that financial guarantors used before getting greedy and expanding into riskier sectors. As long as investors continue to look at bond insurance as the icing on the cake, while still using the underlying credit quality as their main basis for an investment decision, there might be some decent yield opportunities compared with higher-rated debt. On Friday, for example, after we already put out our weekly review, a couple new deals priced with AG Municipal insurance. A Val Verde Unified School District G.O. yielded 2.34% in five years and 3.43% on a 2018 maturity. A Castaic Union School District certificate of participation issue yielded 2.54% in five years and 4.17% in 10 years. The 15-year bond yielded 4.74%. Both of these new sales are rated single-A on their own credit, excluding the perceived benefit of bond insurance. Granted, the more "conservative" an investor, the more they will balk at either a single-A credit or a COP. Other income-oriented investors will take a good look.
(Feb. 12) -- Moody's Investors Service updated its municipal bond default data and noted that only three general obligation bonds it rated had gone into default in the five-year period after issuance from 1970 to 2009. Another 51 municipal deals Moody's rated defaulted in that time frame, centered mainly on the hospital, housing, and university sectors. These default numbers obviously exclude certain "unrated" debt, such as land-secured bonds in California, that have been riskier. But the statistics show just how safe munis have been vis-a-vis other fixed-income sectors. The future might not be quite as rosy because the public sector has become a candy store of sorts for deficit-addicted politicians who owe their political careers to satisfying "public" unions.
(Feb. 11) -- California Controller John Chiang made some remarks that provide even better numbers to accompany our February print edition story on the state's general obligation bonds. In fiscal 2011, after meeting education requirements, the state's budget shows a $47 billion cushion available for debt service. The state's total debt service this year? About $5 billion, Chiang said, adding that "there is plenty of cash available to meet our debt service obligations." If you are a subscriber this is a good footnote for our February print edition.
(Feb. 10) -- Federal Reserve Board Chairman Ben Bernanke says the Fed's targeted federal funds rate should remain low for an "extended period" because of economic conditions, including "subdued" inflation trends. He also says, in prepared testimony for a Congressional hearing, that once the economy grows the Fed will "tighten" monetary conditions as needed to nip "inflationary pressures" in the bud. Bernanke did say the "discount" rate for direct loans to commercial banks could rise "before long" even if the federal funds rate doesn't. We usually don't mention such comments that get wide attention in the "general" media, but they are pertinent to a portfolio strategy we discussed in February's print edition.
(Feb. 9) -- Glendale's issuer credit rating was raised to AAA from AA+ by Standard & Poor's, citing the city's "improved general fund reserves and management practices." Glendale also has "very low debt levels." The issuer credit rating is a measure of the G.O. strength if there were such bonds outstanding. S&P raised Glendale's certificates of participation to AA+ from AA.
(Feb. 4) -- Years and years ago there was a lengthy effort to build a 20-mile rail corridor that would help speed cargo traffic from the Los Angeles and Long Beach ports to other rail connections. This corridor helped sidestep lengthy delays at street-level rail crossings. The Alameda Corridor Transportation Authority sold municipal bonds to finance the work. Moody's Investors Service the other day downgraded the authority's senior-lien bonds to A3 from A2 and it's subordinate-line debt to Baa3 from A3. This move affects about $1.7 billion of bonds. Cargo traffic has dropped sharply amid the recession and lowered the authority's revenue, Moody's noted. While Moody's said another downgrade is possible, the authority is looking at refinancing some of its bonds to lengthen maturities and match the revised revenue outlook. This could stabilize the credit rating or even raise it again. In a positive sign, cargo traffic was up in December at the Los Angeles and Long Beach ports. An economic recovery would boost traffic on the rail corridor, though no on is expecting a boom anytime soon.
(Feb. 3) -- Standard & Poor's has downgraded Pajaro Valley Water Management Agency 1999A certificates of participation to BB from BBB and left them on a "watchlist" for possible downgrade. At first we didn't see the reason, but now S&P has issued its report. S&P is concerned about a judgment that requires the agency to refund increased "groundwater augmentation charges" going back as far as 2003. The agency has to return about $10 million spread out in semiannual installments. Unless the agency is successful in other steps to stabilize its finances, there is more risk it "might not be able" to cover costs, including those for the COPs repayment, S&P said. The agency is exploring ways to "allay credit concerns," S&P added. (As we said previously, we do know the agency is pursuing a "legally defensible" rate increase. The agency ran into issues over Proposition 218 requirements for raising revenue.)
(Feb. 2) -- It is always good to remember there is a forest and also its individual trees. We often think about this analogy when we see credit rating agency reports that examine sectors as a whole (the forest). Moody's Investors Service and Fitch Ratings in recent days both said the nonprofit hospital sector still has a "negative" outlook. These hospitals are big issuers of tax-exempt bonds through government authorities. The rating agency reports are valuable in highlighting current trends. Such hospitals are facing a tough environment because of the recession, government efforts to cut costs, uncertain health-care reform, etc. But some hospitals and nonprofit systems are still stronger than others and investors need to do their homework. As Fitch noted, lower-rated "entities" with fewer resources are going to be affected "disproportionately" by negative rating pressure. The broad-brush "negative" view of this sector also can provide some interesting yield opportunities.
(Feb 1) -- After we ran our weekly review early Friday, the Oak Valley Hospital District priced $18 million of revenue bonds that had been on our upcoming sales calendar since late 2009. S&P rates them at the lowest rung of the investment-grade scale. The five-year bond yielded a tax-exempt 5.25% and the 10-year, 6.25%. The 25-year maturity yielded 7.15%. Granted, these bonds don't fit the bill for certain types of "conservative" investors, but some buyers with diversified portfolios would be tempted by these yields.
(Jan. 29) -- The City of Placentia's 2003 certificates of participation have been downgraded to BB+ from BBB- by Standard & Poor's. The outlook is "stable." The downgrade reflects a deficit borrowing by the city last year "and an expected 2010 loan from the city's sewer utility to balance its budget, combined with further weakened financial performance in 2010," S&P said. Budget-balancing efforts give "reasonable assurance" the city's available resource can cover debt payments, S&P added. (We should add that, while BB+ is no longer considered "investment grade," it probably doesn't indicate as much risk for a muni security as it would a corporate bond.)
(Jan. 28) -- Puerto Rico's single-A sales tax bond sale rose to $1.84 billion thanks to good investor demand. This week a California resident could buy a new in-state water revenue bond or a community college G.O. (double-A) and get 10-year yields of 3.15% and 3.33, respectively. They could buy the 10-year Puerto Rico maturity and earn a federal and state tax-exempt 4.38%. Yes, you're going to a lower credit quality (single-A), but a full percentage point of extra yield looks good for an income-oriented investor. Puerto Rico's six-year bond yielded 3.38%, still topping our in-state example. The longest 32-year bond yielded 5.65%. Yesterday the Southern California Public Power Authority sold $236 million of revenue bonds for a wind-driven power project (S&P AA-, Moody's, A1). We previewed this deal recently. The 10-year SCPPA maturity yielded 3.59%, still well below what an investor could get on the Puerto Rico sale.
(Jan. 27) -- While the final institutional pricing is still pending today, the "retail" order period for Puerto Rico's single-A sales tax bonds featured decent yields. Preliminary yields dropped slightly on the second day of "retail" to reflect good demand for shorter maturities. The longest 32-year bond might end up with a final yield around 5.7% and an insured 30-year maturity could be around 5.25%. Those are just "guesstimates," we'll know soon enough.
(Jan. 26) -- We have stressed in the past that the Vallejo City Unified School District is a separate issuer and unaffected by the City of Vallejo bankruptcy filing. In a bit of a confirmation of that fact, Standard & Poor's has upgraded the school district's G.O. bonds to BBB from BBB- and upgraded the district's certificates of participation to BBB- from BB+. Among other things S&P cited a "record number" of budget cuts that restored budgetary balance. These upgrades apply to "underlying" ratings because the bonds also are backed by financial guarantees.
(Jan. 26) -- Moody's Investors Service has $6.7 billion of California Housing Finance Agency home mortgage revenue bonds under review for possible downgrade. The performance of the loan portfolio is a factor because of rising delinquencies in the current housing market, Moody's said. The current "underlying" rating of these bonds is Aa3. In addition, Moody's noted that about four-tenths of the portfolio is insured by the agency's separately-capitalized California Housing Loan Insurance Fund. Moody's has just downgraded its "issuer" rating on this fund to B2 from Aa3 because of expectations it will have to cover growing delinquencies. Many smaller muni investors probably don't own these housing bonds, but the trend is worth noting.
(Jan. 25) -- Although not a surprise, final statistics showed that municipal bond downgrades rose markedly as the economic downturn hit government revenue, Moody's Investors Service noted. There were 279 downgrades of tax-backed bonds, up from 81 in 2008, Moody's said. Revenue bonds, including those backed by hospitals, registered 300 downgrades, up from 133 in 2008. Of course, there are stronger and weaker revenue bonds, and a water revenue bond tends to be stronger than one for a struggling rural nonprofit hospital. Even during a tough time, there were still upgrades. Ratings rose on 320 tax-backed munis and for 64 bonds backed by various revenue streams, Moody's said. "We expect negative trends to continue" for at least a year, Moody's said. A tax collection rebound typically lags an economic recovery.
(Jan. 22) -- A Puerto Rico sales tax revenue bond sale we flagged in late December is expected to price next week. The single-A credit ratings are higher than the commonwealth's triple-B general obligation rating. A California resident who buys Puerto Rico bonds receives interest earnings that are exempt from state and federal income tax, just as if they were buying an in-state municipal bonds. Some of our readers buy Puerto Rico munis for the sake of diversification.
(Jan. 21) -- We were asked about a $240 million revenue bond sale by the Southern California Public Power Authority in connection with a 97-turbine wind farm near Milford, Utah. SCPPA is using the bond proceeds to prepay for 20 years of energy from the project. Moody's Investors Service rates the bonds A1, largely because the Los Angeles Department of Water and Power is a 92.5% participant in the project. Take-or-pay contracts provide strong security for the bonds because utilities are on the hook, even if the wind-powered project doesn't pan out as intended. That is it in a nutshell, though an upcoming print edition will have more to say about certain changes in the landscape for municipal utilities. Burbank and Pasadena also are participants in this project.
(Jan. 18) -- The January "bonus" edition was mailed last week and will arrive for most of you after the Martin Luther King holiday. The January 2010 "regular" edition will follow in about a week, we've had a glitch with our annual Taxable Equivalent Yield tables. The "free" updates will resume on a regular basis beginning January 19.
(Jan. 15) -- Looking at this week in review, we would say that California's downgrade to A- from A by Standard & Poor's on Wednesday was the "non-news" of the week. A one-notch adjustment at this point does almost nothing to affect trading levels since the market is way ahead of the rating agencies whenever California's finances deteriorate. "We remain concerned that the political process could impede timely solutions," S&P said about this year's upcoming budget debate. That sentence could apply to any year in California.
(Dec. 24) -- The California Department of Water Resources power supply revenue bonds, issued after the state's energy crisis early this decade, have been upgraded to AA- from A+ by Standard & Poor's. The department's power program now faces less risk and it maintains adequate operating reserves to guard against rising energy prices, S&P said. The upgrade affects $9 billion of bonds. The state's power supply program will terminate in a few years.
(Dec. 23) -- Banning Community Redevelopment Agency tax allocation bonds (Series 2007) have been downgraded to BBB from A- by Fitch Ratings, with a "negative" outlook. Separately, Moody's Investors Service lowered $195 million of Hesperia Community Redevelopment Agency tax allocation bonds (Series 2005 and Series 2007) to Baa2 from Baa1. The Hesperia bonds remain on a Watchlist for possible further downgrade. In both of these cities, significant declines in assessed valuation are the culprit because of the real estate market downturn. As we have noted in the past, redevelopment bonds can't all be lumped together. Moody's just upgraded subordinate TABs in Oceanside (Series 2002 and 2003) to Baa2 from Baa3, citing recent tax base growth.
(Dec. 21) -- Citing "continued poor operating performance," Moody's Investors Service downgraded bonds backed by the Whittier-based Southern California University of Health Sciences to B3 from B1. The Series 1997 debt was issued by the California Educational Facilities Authority. The university "offers programs in chiropractic medicine, acupuncture and oriental medicine; market position continues to weaken as represented by a 20% enrollment decline from fall 2004 to fall 2008," Moody's said. Real estate sales and endowment draws have been used to cover operations. Budget cuts and new academic programs could help restore "positive operating margins" by fiscal 2011, assuming projections are met, Moody's said. A recent enrollment target also was met. Moody's also downgraded this issuer in November of 2008, when the rating fell from Ba1 to B1.
(Dec. 17) -- An economic and revenue slowdown translated into a one-notch downgrade of Port of Oakland senior lien revenue bonds to A2 from A1. "The downgrade is based on the deterioration in the port's FY2009 aviation market position, enplanement levels, and maritime cargo levels that has resulted in lower-than-projected revenue growth, rising cost per enplanement, and reduced liquidity levels" Moody's Investors Service said. Intermediate lien revenue bonds fell to A3 from A2. The outlook is "stable." The action affects $1.4 billion of existing debt.
(Dec. 16) -- We noticed early this morning that Standard & Poor's assigned a double-A "new" rating to $339 million Series 2006 Sacramento County Sanitation Districts Financing Authority Revenue Bonds. Why a "new" rating for older bonds? We will take a guess. The official statement shows a triple-A rating based on FGIC bond insurance. Perhaps the district decided to get an "underlying" rating since, even with MBIA now reinsuring FGIC bonds, the insurance rating is no longer triple-A. That's our guess, maybe there was another reason.
(Dec. 14) -- We recently discussed a pending "story bond" being sold by the Adelanto Public Utility Authority. The deal did price late last week and we forgot to include details in our weekly wrap-up. The unrated revenue bonds yielded 4% in 2014 and 5.55% in 2019. The 15-year maturity yielded 6.22% and the 30-year, 6.90%. In contrast, a single-A water revenue bond priced by a Ceres authority on Friday yielded 2.50% in 2014 and 4.01% in 10 years.
(Dec. 11) -- Continuing concern about the "financial health" of the nonprofit San Diego Natural History Museum prompted Moody's Investors Service to lower the rating on Series 1998 certificates of participation to Caa2 from B1. That is a four-notch downgrade. The conduit COPs were issued by San Diego County on behalf of the museum and security is based on gross revenues of the nonprofit. The museum's "liquidity continues to remain a serious concern" because it hasn't met operating projections, Moody's said. The museum does expect to meet a Jan. 1, 2010, debt service payment of about $750,000, Moody's said. We have flagged this deal before because of declining financials. The rating outlook has been revised to "negative" from "stable," Moody's said. The downgrade affects $12 million of COPs.
(Dec. 10) -- Standard & Poor's said it withdrew ratings on 10 Qualified School Construction Bonds (QSCB) that were provided in October and November for California districts. None of the bonds affected by the withdrawal have been sold. "We have learned, subsequent to our issuance of the ratings, that bond counsel is questioning the authority of the California Department of Education to allocate the state's QSCB allocation" under the federal "stimulus" legislation. We have mentioned QSCBs briefly, they are a form of taxable municipal bond offering a tax credit. A few California school districts have sold these bonds because they received an allocation directly from the feds. Another $700 million of QSCB allocation was given out through a lottery system by California's Department of Education. The problem seems to stem from a somewhat technical issue over language, and a legislative fix might be able to clear up the matter. That will probably require added clarification because the lottery "winners" were supposed to sell the QSCBs this year. We have a better idea. Scrap this stupid plan for yet another sneaky federal giveaway of tax dollars and use the more efficient tax-exempt market instead.
(Dec. 9) -- Standard & Poor's affirmed its "underlying" BBB rating on Stockton Port District Series 2007A and 2007B port revenue bonds. However, the rating outlook was changed to "negative" from "stable." (The outlook is an indicator of possible longer-term rating trends and isn't the same as a downgrade warning.) These bonds also were insured by MBIA, with the policy now segregated in a newer MBIA public finance subsidiary. The revised outlook "is based on our view of the continued downturn in cargo traffic at the port, coupled with a weak liquidity position," S&P said in a release. "In our view, the low level of unrestricted cash reduces the port's financial flexibility, particularly if decreased operating activity weighs on revenues and debt service coverage. We believe a deterioration in financial metrics without increased unrestricted reserves would likely lead to a lowered rating."
(Dec. 9) -- Our December print edition notes a trend of occasional redevelopment bond downgrades amid falling assessed valuation due to the real estate downturn. As usual, you can't generalize across the board. The San Francisco Redevelopment Financing Authority tax allocation bonds for the Mission Bay North Redevelopment Project were just upgraded to Baa2 from Baa3 by Moody's Investors Service. The upgrade affects Series 2005D TABs and Series 2006B TABs. "The upgrade reflects the very large increase in assessed value (AV) in recent years of this geographically small project area and the related significant reduction in tax taxpayer concentration," Moody's said. The completion of most of the planned development helped boost this project.
(Dec. 8) -- Okay, we admit it. We are fascinated with municipal bonds issued by various U.S. territories, especially when they aren't investment grade. Interest earned on such bonds is federal and state tax-exempt for investors in all 50 states. One of those issues involves the Guam Waterworks Authority $100 million of Series 2005 water and wastewater system revenue bonds. Moody's Investors Service has just changed its outlook to "stable" from "positive" because of a "failure to meet the rate covenant" for the debt, which is rated Ba2. Part of the problem stems from "faulty water meters" that canceled out the benefits of recent rate increases. The authority is moving to correct the water meter problem as part of an effort to be back in compliance with the rate covenant. The good news is that the Guam authority serves the water needs of 95% of the population. This "essentiality" is a huge plus for the bonds no matter what they are rated.
(Dec. 7) -- As 2009 winds down, look for plenty of issuers to try to price new municipal bond issues either this week or next week before the traditional year-end lull. Higher-rated borrowers are once again seeing exceptionally low rates. On Friday a financing authority priced double-A sanitation system bonds for the Las Virgenes Municipal Water District. A five-year maturity yielded 1.60% and a 10-year, 3.05%. A 14-year bond yielded 3.75%. On the same day the Victor Elementary School District priced single-A G.O. bonds with AGC insurance and paid 2.23% in five years and 3.79% in 10 years. At the other extreme, Puerto Rico last week sold $210 million public improvement refunding bonds with ratings at the bottom of the investment-grade ladder. The entire deal was packed into a 30-year maturity and yielded a tax-exempt 6.20%.
(Dec. 3) -- The Pleasanton Unified School District's general obligation bonds were downgraded to A+ from AA- by Standard & Poor's, which cited a "volatile" financial performance over the last several years. Reserves in and outside the general fund have fallen to levels "we consider only adequate," S&P said. The district COPs were cut to A from A+. The rating outlook is "stable."
(Dec. 1) -- A $43 million tax-exempt bond sale is looming to help construct independent living apartments and finance other purposes for the Atherton Baptist Homes Project in Alhambra, California. The twist is that the bonds are graded BB by Fitch Ratings, which noted the "construction and fill-up risk of the project in a difficult economic environment." On the plus side, the Atherton Baptist project has a long history and stable occupancy rates "and adequate liquidity relative to expenses," Fitch said. We recently wrote about another double-B issue for a regional center serving a developmentally-disabled population. New muni issues rated below investment-grade are uncommon but, as these example show, not unprecedented. The tax-exempt yield will be juicy because of negative publicity for continuing care retirement communities in general, but sophisticated investors might conclude the Atherton Baptist project is a good bet. Fitch assigned a "stable" outlook at double-B. (Certain nonprofits can benefit from tax-exempt bond allocations, helping to lower their borrowing costs.)
(Nov. 25) -- About $3 billion of Los Angeles municipal bonds were downgraded one notch by Fitch Ratings, in part because the economic downturn is leading to a projected structural budget deficit in future years. Fitch also raised a red flag about "rising pension costs" and warned that the city has to achieve savings from public unions in this area as one way to help keep current ratings. As a result, Fitch has a "negative" outlook on the city's debt while it monitors city efforts to cut costs. Los Angeles $1.5 billion of general obligation bonds dropped to AA- from AA. The city's $1 billion of COPs and lease revenue bonds dropped to A+ from AA-, as did its convention center bonds and judgment obligation debt. "The city's four-year financial projections indicate a worsening structural imbalance even incorporating the recurring portion of the budget savings enacted this year," Fitch said in a report. The city has seen unemployment surge during the current downturn and assessed valuation dropped 1% in 2010. Fitch also noted the city's historic strengths, with a large diverse economy and a "moderate" debt burden.
(Nov. 25) -- Citing "declines in financial performance" over the last two years, Fitch Ratings downgraded the Modesto Irrigation District's $459 million electric COPs by one notch to A from A+. The district decided in fiscal 2009 to cancel previously-approved rate increases designed to help offset higher power purchase costs and lower hydroelectric production. As a result, the district's financial cushions were reduced, Fitch said. However, a rate increase might be implemented in fiscal 2010. (We should add that utilities can face a dilemma during a recession because they don't want to increase costs for users if they can avoid it. As usual, there are trade-offs.) Fitch also downgraded M-S-R Public Power Agency revenue bonds (San Juan Project) by one notch because the Modesto Irrigation District covers 50% of the debt service obligation.
(Nov. 24) -- Moody's Investors Service the other day warned Inglewood it might downgrade the city's A3 issuer rating and Baa1 pension obligation bond grade because of tardy financial statements. "Neither audited nor unaudited information regarding the city's recent years' financial performance is currently available," Moody's said. "The city is in the process of bringing its audits up-to-date, having recently released the fiscal 2007 report (fiscal year ending September 30) which shows the city closing that year in a strong financial position." A fiscal 2008 statement should be out by the end of the year and Moody's expects to make a rating decision after evaluating those numbers and performance in more recent fiscal years. Inglewood's assessed value in 2010 stayed about level with the previous year, Moody's said. The city's unemployment rate is running higher than the state average.
(Nov. 23) -- A couple weeks ago we mentioned an upcoming bond sale that couldn't quite land an investment-grade rating (it was Ba1 from Moody's Investors Service). We forgot to mention that it was priced last week and yielded 8% tax-exempt in 20 years and 8.50% in 30 years. It was issued through the California Municipal Finance Authority on behalf, ultimately, of the Harbor Regional Center. For our previous item about the sale go here.
(Nov. 20) -- San Bernardino County has been taken off a Watchlist by Moody's Investors Service. (This item was actually posted Nov. 19 and we have moved it to this page from the "Home" page.) We discussed the reason for the "watch" in an October 7 item on our Bond Updates page. "The ratings have been removed from Watchlist as it has become clear that the recent, unanticipated termination of a Standby Bond Purchase Agreement (SBPA) will not have a material impact on the county's credit," Moody's said in a report. We won't go into the complicated explanation since the all the county's ratings from Moody's have a "stable" outlook and the potential problem isn't a problem after all.
(Nov. 19) -- Merced County Regional Waste Management Authority solid waste revenue bonds were downgraded to Baa3 from A3, a three-notch reduction, by Moody's Investors Service. The downgrade "reflects noticeable deterioration in waste deliveries to the system since 2007 resulting in the authority's heavy reliance on the rate stabilization fund to meet their net revenue coverage covenant," a Moody's report said. A recently-approved five-year annual rate increase of 5.2% "should help gradually" to stabilize project revenue, Moody's added. A "negative" outlook remains on $32 million of affected debt. The pursuit of cost saving measures and an increased tipping fee could lead to a "stable" outlook.
(Nov. 19) -- The bankrupt Valley Health System didn't make recent installment payments to the trustee, triggering a default on debt service interest due Nov. 15, 2009. A rating agency had previously foreshadowed the potential default and at this point it isn't a surprise. The bigger issue looming is a December 15 election to sell the health system's remaining hospitals in Hemet and Menifee to a suitor. We would expect a successful sale to cure the default and also pay off all the remaining tax-exempt debt. The default affects the Valley Health System certificates of participation (1993 Refunding Project) and the VHS Hospital Revenue Bonds (1996 Series A). The debt service reserve fund for both issues still contained enough money to have met the November interest payments. The Bond Advisor will have something to say about that in the December 2009 print edition.
(Nov. 19) -- The bankrupt Sierra Kings Health Care District told a trustee it plans to make a November deposit so an interest and principal payment can be made December 1 on its 2006 Series A and 2006 Series B revenue bonds. The Bank of New York Mellon Trust Co., which is the trustee, provided this information in a notice. The trustee also said the October deposit of about $43,000 for these revenue bonds was previously received. The bankruptcy filing is discussed here.
(Nov. 18) -- We did some quick back-of-envelope addition on the new bond sales added to our Upcoming Sales list in recent days. More than $600 million of new municipal bonds are looming, mainly from "smaller" issuers selling $50 million of debt or less. A good chunk of these sales probably will occur in December. That doesn't include quite a few other pending deals. More than $4 billion of new sales are on the list, but well over half of that total will disappear because of a couple billion-dollar pricings this week from two issuers at the top of the list, along with another large sale. New "bigger" additions include a Northern California Power Agency hydroelectric project revenue bond sale. Those bonds fall in the single-A category. In early December the University of California Regents will sell $700 million of pooled revenue bonds. However, $500 million will be structured as taxable Build America Bonds so we only list the sale at $200 million. If we recall correctly, during the fourth quarter of 2008 only about $4 billion of municipal bonds were sold across the entire U.S. because of the lingering impact of the credit "crisis." At least on that front the municipal bond market has returned to a more "normal" period (except for the taxable BABs siphoning off new tax-exempt supply). We have to do some housecleaning on our sales list because sometimes a few of the deals already were priced, but in general most of the listed bonds are in fact pending.
(Nov. 17) -- We have now received the rationale for a Standard & Poor's five-notch "downgrade" of the Julian Union High School District. This is an update of an earlier item in this space. According to S&P, the district had gone to A "developing" from AAA "negative." Now we have the details. S&P said it was correcting an "administrative error" because the rating is based on an insurance policy from National Public Finance Guarantee (formerly MBIA). We did know this district has been facing a budget crunch, based on a past state "negative certification, " but the rating change was because of another reason. The only debt we can locate at a quick glance involves a small amount of capital appreciation G.O. bonds dated April 1996 that mature from 2009 to 2020. Another current-interest bond dated March 1996 already has been paid off as of last year. We do know the Julian Union High School District has been on a California Department of Education list of districts facing budget pressure (called "negative certification"). As it turns out, we were right in saying earlier that "the downgrade could also be for some other reason so don't jump to conclusions." It was a correction, not a downgrade.
(Nov. 16) -- The other day Standard & Poor's upgraded San Juan Capistrano general obligation bonds to AAA from AA+. The city plans to sell $30 million of new G.O. bonds soon. The city's sales tax receipts, the biggest share of general fund revenue, have been dropping amid the recession. Nevertheless, San Juan Capistrano maintains reserves equal to about 60% of annual operating expenses, a level S&P called "excellent." The housing market downturn also hasn't affected the city's tax base as much as other areas of California, S&P added, and the city has benefitted from recent years of "strong economic performance."
(Nov. 13) -- A decision to increase operating cash reserves helped the Los Angeles Department of Water and Power get a "positive" outlook rather than "stable" from Moody's Investors Service for its water system revenue bonds. The city earlier this year committed to quadrupling its water enterprise operating reserve target to $200 million by fiscal 2012 (or possibly even fiscal 2011). "The water enterprise's cash and financial reserve position has typically been below average compared to other large, highly-rated water enterprises and this new policy should bring it closer to the average," Moody's said in a report. As we note elsewhere, the L.A. utility plans to sell bonds next week.
(Nov. 12) -- It has been earnings week for the parent companies of bond insurers and, as expected, some are still in the dumps except for Assured Guaranty Ltd. (AGC). Assured Guaranty is now the main player providing bond insurance for municipal debt. AGC previewed its third-quarter earnings this week. It expects to report a loss of $35 million for the quarter, down from $63 million in the same year-earlier quarter. AGC didn't diversify as much into backing riskier products and its losses have been far smaller than other insurers. AGC's new business rose 13% over a year ago thanks to municipal bond insurance. The AGC insurance subsidiary is rated AAA by S&P, [Nov. 12 Update: downgraded to Aa3 from Aa2] by Moody's, and AA- by Fitch. Meanwhile, the parent of insurer MBIA reported a third-quarter loss of $728 million, down from a $807 million loss in the same period a year ago. MBIA continues to struggle with its foray into riskier mortgage-related guarantees. In a conference call, an MBIA executive said he hopes legal challenges against National Public Finance Guarantee Corp. can start to be resolved in 2010. The "old" municipal bond guarantees of MBIA were segregated into this new subsidiary to insulate them from riskier exposure; that move has helped NPFGC hold on to higher ratings (A and Baa1). The parent company of Radian Asset Assurance (BBB- and Ba1) reported a third-quarter loss of $71 million, up from $37 million a year ago. Mortgage-related delinquencies continue to dog Radian as well. Finally, it was a good thing Assured Guaranty, with the help of New York's insurance regulator, agreed last year to reinsure the $13 billion municipal bond portfolio of CIFG. What remains of CIFG was downgraded by Moody's yesterday to Ca from Caa2 and the rating was withdrawn. A regulatory takeover remains a possibility because of capital requirements, Moody's said.
(Nov. 11) -- The parent company of bond insurer Ambac Assurance Corp. has warned that it may need bankruptcy protection within two years unless turnaround strategies succeed. The parent, Ambac Financial Group, has been hammered by the company's foray into riskier securities, including those tied to mortgage-backed products. While 14% of Ambac Assurance's insured portfolio is rated below investment grade by the company, the vast majority of that sum (about $54 billion) is tied to various mortgage-related securities and derivatives. About $2.6 billion of Ambac's below-investment-grade guarantees are linked to public finance, almost half in "transportation" (we are guessing that includes toll road bonds). We are taking these numbers from Ambac's latest 10-K filing from this week. As we have stressed before, the vast majority of municipal bonds Ambac guaranteed were decent quality to begin with and aren't likely to default. In the first nine months of 2009 Ambac reported only $5.9 million of net losses paid in its public finance (muni bond) portfolio, and in general such payouts don't involve tax-backed debt. In contrast, the riskier mortgage securities and other products in Ambac's "structured finance" category showed $923.8 million net losses paid in the same nine-month period. Remember, the credit rating you now rely on is probably the "underlying" rating on the municipal bond unless, of course, an "underlying" rating was never pursued. Then you need to do some homework to make sure you own a solid credit. Two things to note: (1) Ambac continues to pay on any municipal bond guarantees when losses arise and, (2) We still think at some point a regulator or someone will try to make sure Ambac's municipal bond component gets "segregated" or eventually folded into a stronger company.
(Nov. 10) -- The Harbor Regional Center, which provides state-funded services to the developmentally disabled population in southwest Los Angeles County, will back $25 million of bonds with a credit rating one notch below investment grade. The Ba1 rating reflects the "high reliance" of the regional center on state funding, Moody's Investors Service said. In addition, such regional centers received attention this summer because of their lower priority during the state's cash crisis. They received state IOUs because they rank below other protected payments, such as education and general obligation debt. This is a point the Bond Advisor made when IOUs were issued; the process actually helped G.O. bondholders by preserving cash. The Harbor Regional Center's reliance on the state makes it more vulnerable to payment delays or budget reductions, Moody's said. Even so, the center is providing "essential services" that must be provided under both legal statute and state court decision. California also has shown "strong" financial support for such centers, even during times of budget stress, Moody's added. The California Municipal Finance Authority will issue the bonds under a lease arrangement with the Del Harbor Foundation. Proceeds will pay for office facilities that will be leased to the regional center. Remember, such revenue bonds include a debt service reserve fund that can be tapped to cover a year's worth of payments. This is good to know when there is concern about state payment disruptions. (This summer, however, the Harbor center was able to cash its $15.8 million of IOUs with a bank that took them.)
(Nov. 9) -- The California Statewide Communities Development Authority is marketing the bonds due in four years that will help local governments offset the impact of a state property-tax shift. As we noted in a Nov. 3 item below the bonds carry the same ratings as the state's own general obligation bonds. Based on recent trading levels for other California bonds, the new debt that matures in mid-2013 should yield in the neighborhood of 3% tax-exempt. The final rate will be set when institutions place orders on Tuesday (Nov. 10). In our November print edition we discuss one way to address concern about future rising rates because of inflation or other changes. This offering doesn't exactly fit the "short end" of that approach. Still, it might entice some smaller investors because the Taxable Equivalent Yield (TEY) jumps above 4% for some joint filers even if they are below a $100,000 bracket; the TEY is above 5% for the much higher tax brackets.
(Nov. 5) -- Last night the Oceanside City Council voted three-to-one (one member was absent) to raise water rates by almost 20% and sewer rates by almost 30%. The increases were higher than the city considered in October, no doubt to respond to a downgrade warning by Standard & Poor's. City staffers told the council the rate increases were needed so Oceanside would keep meeting promised debt-service coverage ratios on 2003 and 2008 certificates of participation. Perhaps these increases will help remove the downgrade warning from S&P, though a decision usually isn't made quickly because the actual rate increase must be evaluated. The background on all this is lower on this page. Oceanside needed to raise rates in part because a key water supplier boosted its charges late this summer.
(Nov. 4) -- In our November print edition we noted that the upcoming Palomar Pomerado Health $225 million certificate of participation sale would offer intriguing yields due to the triple-B Fitch rating. Moody's Investors Service now has downgraded the health provider's parity revenue bonds to Baa2 from Baa1 and rates the COPs Baa2 as well. Moody's also downgraded PPH's unlimited tax G.O. bonds to A2 from A1. Moody's cited a "heavy debt load" because of a doubling of outstanding revenue bonds, along with the expense of a big multiyear capital improvement program. On the plus side Moody's noted that PPH continues to have a "dominant market position" in northern San Diego County and has "significantly improved" its operating performance recently. This will be an intriguing sale for sophisticated investors who are willing to take potential downgrade risk in exchange for decent yields. (By the way, remember that certain existing PPH bonds also carry bond insurance from FSA and the former MBIA.)
(Nov. 3) -- We noted recently that the California Statewide Communities Development Authority plans on November 10 to sell $1.75 billion of bonds to offset the impact of the state's property-tax grab on local governments. The details of that grab are here. The rating agencies have now weighed in on the bond sale and given it the same rating as California's own general obligation bonds. Here is how Moody's explains the rationale for its Baa1 rating: "The State of California, which is constitutionally obligated to repay the local agencies for the borrowing under the Prop. 1A suspension, is the sole obligor. Statute dictates that the state's repayment takes priority over all other obligations of the state except education and general obligation debt service. As repayment comes directly after general obligation debt service in the priority of payments, this credit has received the same rating as state's general obligation debt." Fitch rates the bonds BBB and Standard & Poor's, A. The short-term bonds are expected to mature on June 15, 2013, and won't be subject to early redemption, Fitch said.
(Nov. 2) -- Last month we summarized a global settlement that finally provided some justice for holders of the Los Angeles Regional Airport Improvement Corp. lease revenue bonds sold for United Air Lines Inc. This involved the 1984 bonds due Nov. 15, 2021, and the 1992 bonds due Nov. 15, 2012. Long-time readers will recall the battle that United launched over these leases while the company was still in bankruptcy. Interested investors should check a new October 29 notice from the bond trustee for updated details on a revised proposed order for the settlement motion. A court hearing is planned Nov. 10 on the settlement. Assuming the settlement gets approved bondholders will get all their principal back and 95% of all interest accrued through the Feb. 1, 2006, effective date of United's bankruptcy reorganization plan.
(Oct. 29) -- As expected under current economic conditions, downgrades of municipal bonds continue to exceed upgrades. In the third quarter Moody's Investors Service said the ratio of municipal scale upgrades to downgrades was 0.8-to-1, compared with 0.7-to-1 in the second quarter. The credit deterioration began a year ago in the third quarter of 2008 as the U.S. recession deepened. "While there is a growing sentiment among many economists that the longest recession in the nation's history is coming to an end, negative pressure is expected to remain on all public finance sectors as balance sheet growth is expected to lag the national economic recovery," a Moody's release said. In terms of dollar par value the downgrades looked even bleaker because $72 billion in State of California debt was lowered in the third quarter, Moody's noted, representing about two-thirds of the par value total. The second-biggest dollar size downgrade also was in our state with a one-notch lowering of $6.8 billion California Housing Finance Agency home mortgage revenue bonds. Other rating agencies are seeing similar trends though their actual upgrade/downgrade activity can vary.
(Oct. 28) -- Palomar Pomerado Health, which has a leading 54% market share in the northern San Diego County market, plans to sell $224 million certificates of participation, according to Fitch Ratings. The deal should be intriguing from a yield standpoint because the COPs are rated triple-B. Credit spreads have narrowed but a triple-B health deal still will offer some decent premium. The health provider's "profitability rebounded strongly" in fiscal 2009, Fitch said. The triple-B standing reflects growing debt levels and lower-than-average "liquidity" levels for the rating category, Fitch said. However, continuing profitability would boost the balance sheet and that is part of management's strategy. Palomar Pomerado oversees the 324-bed Palomar Medical Center in Escondido and the 107-bed Pomerado Hospital in Poway, two skilled nursing facilities, a surgery center, and an ambulatory care center, Fitch noted.
(Oct. 28) -- As we expected yesterday, the reason for the Standard & Poor's rating warning for Oceanside Series 2008 wastewater revenue refunding certificates of participation boils down to whether the city will protect the debt with appropriate financial cushions. "The CreditWatch listing reflects our view of the recent failure by the city to approve necessary rate increases to meet its rate covenant of 1.15x annual debt service without commensurate expenditure cuts," S&P said in a release. "If the city does not enact sufficient rate increases or expenditure reductions, the rating could be lowered. Additionally, the rating could be lowered multiple notches if the city is not able to support its rate covenant of 1.15x and acceleration of principal payments is triggered." On the other hand, S&P said the rating warning could be removed if the city council acts to ensure the COP financial cushions are protected. The city council approved a rate increase on October 14 but the vote ran into procedural snags and wasn't valid. We believe the council will re-consider the matter on Nov. 4 and we expect Oceanside to do the right thing to protect financial cushions on the COPs. The procedural issue has been addressed and it is now said the rate increase can pass with a simple majority (the Oct. 14 vote was three-to-two in favor of a rate increase). In any event water and sewer rates will have to rise or staffing will have to be slashed. S&P said it isn't sure proposed budget cuts would provide enough savings to address its concern.
(Oct. 27) -- A big bond-financed capital improvement plan prompted Fitch Ratings to change its outlook on Los Angeles Department of Airport bonds to "negative" from "stable." This action isn't as strong as a downgrade warning, but it does indicate the rating agency is watching how future trends are managed. The change to a "negative" outlook "reflects the increased potential for stress to the airport's cost and financial profile in conjunction with" a $5.6 billion capital improvement plan from 2009 to 2016, Fitch said. More than half the plan might be debt financed, leading to higher fixed costs in the immediate future, Fitch added. Fitch still rates the Los Angeles International Airport senior revenue bonds a solid double-A and the subordinates a notch lower. (Moody's rates the senior bonds Aa3, already a notch lower than Fitch's current rating.
(Oct. 23) -- Earlier this week an underwriting syndicate member flagged for us a Los Angeles Board of Airport Commissioners agenda because of an item for a $1.6 billion revenue bond sale. The item was approved, with $700 million of bonds set to raise money for capital improvements. The other $925 million will refund previously-issued bonds. The sale will feature Los Angeles International Airport senior and subordinate revenue bonds. Part of the refunding will hinge on a tender for existing bonds currently subject to the federal Alternative Minimum Tax. The federal "stimulus" legislation included a two-year window in which certain issuers can seek to pay off recent AMT bonds with non-AMT bonds, thereby lowering borrowing costs.
(Oct. 22) -- This week we received yet another call about the Vallejo City Unified School District, and the question involved a matter we discussed eons ago. The City of Vallejo is in Chapter 9 bankruptcy but that has nothing to do with the school district. The school district is NOT in bankruptcy. Apparently the question was prompted by a recent Moody's Investors Service downgrade of California State School Fund Apportionment Lease Revenue Bonds Series 2005A (Vallejo City Unified School District). The rating fell to Baa2 from A3 to reflect the fact the state previously was downgraded. Despite the downgrade, these bonds benefit from excellent security because of an "intercept" mechanism that directs state apportionment funds to the trustee for lease payment before the money ever gets to the district. As Moody's noted, the "sizable amount of intercepted funds allows the bond rating to continue to be based on the state's rating." Vallejo's school district has certainly had to cope with budget pinches but it is NOT in bankruptcy. By the way, Moody's also downgraded such "intercept" bonds for certain other school districts (Oakland and West Contra Costa districts come to mind).
(Oct. 21) -- We hear the California State Public Works Board lease-revenue bond sale is probably going to include even less tax-exempt debt than the "crumbs" we discussed previously. (Update: Fortunately it won't be as bleak as our introductory sentence suggests. We're glad to say a dealer who told us the tax-exempt portion would be $30 million had only looked at the Series H part of the deal. The $790 million Series G will also include tax-exempts so at least it won't be as bad as we feared. Nevertheless, the taxable portion will be roughly a half-billion dollars of an overall $820 million sale so it is still pretty bad for tax-exempt fans.)
(Oct. 20) -- California State University systemwide revenue bonds will keep their Aa3 rating from Moody's Investors Service and are off a "watchlist" for potential downgrade. In addition, the CSU lease-revenue bonds sold by the California State Public Works Board were confirmed at A1, Moody's said. The action, which affects $3.6 billion of debt, reflects Moody's belief that the CSU system "can successfully manage the substantial cuts in state funding through the combination of student tuition and fee increases, expense controls including faculty and staff furloughs, and active management of optimal enrollment levels." The outlook is "stable."
(Oct. 19) -- Capistrano Unified School District School Facilities Improvement District No. 1 general obligation bonds were downgraded the other day to A+ from AA by Fitch Ratings. The rating outlook is "stable." The move affects $51 million of bonds. The district is facing serious budget pressure because of "steep cuts from the state in both revenue limit and categorical funding," Fitch said. To maintain the A+ rating the district needs to achieve "budgetary balance" in fiscal 2011 (which begins July 1, 2010) and start rebuilding general fund reserves in future years, according to Fitch. This month district officials suggested about $9 million of potential cuts toward closing an estimated $25 million deficit next year.
(Oct. 16) -- Holders of about $22 million California Municipal Finance Authority bonds (Series 2007A, Pacific Life Institute) have something to cheer. The long-term rating on the bonds is now Aaa from Moody's Investors Service, up from the non-investment grade level of Ba3. It isn't that the institute itself looks that much better. Rather, the upgrade reflects provision of a "confirming letter of credit" for the deal from the Federal Home Loan Bank of San Francisco, effective Oct. 15, 2009. The previous Ba3 rating was based on a letter of credit from California Bank & Trust. The short-term rating for the variable-rate debt is also now a top VMIG1 thanks to the new FHLB letter of credit.
(Oct. 14) -- We noticed in a Standard & Poor's downgrade of Sierra Kings Health Care District (following a bankruptcy filing, see Oct. 9 item below) that some bonds also carry a financial guarantee. S&P downgraded the district's "underlying" ratings to C from B after the bankruptcy filing. The district continues to struggle with operating losses and a high debt load, S&P noted. The S&P downgrade mentioned two insurers in connection with the district bonds: FGIC and National Public Finance Guarantee Corp. (the municipal bond "successor" to MBIA). FGIC bonds are also backed by the safer MBIA subsidiary now. Despite the bond insurer's own downgrade, it should be able to step in if the Sierra Kings district temporarily missed debt payments during the reorganization process. However, we don't think all the district's debt carried bond insurance, so keep your issues straight. We expect the G.O. debt to be protected long-term but you never know what lawyers will try to propose. The other interesting thing continues to be the fact that some bond proceeds were apparently used for operating expenses. That is a big, big, no-no.
(Oct. 13) -- It is a sign of how much the bond insurance industry has changed that it is a "moral victory" of sorts when a downgrade is only one notch and a rating warning gets removed. Fitch Ratings finally acted on its rating warning and lowered Assured Guaranty Corp. by one notch to AA- from AA and Financial Security Assurance to AA from AA+. Fitch cited the potential for higher losses than it previously expected on certain first-lien mortgage securitization products. Fitch took both companies off a "watch" list for further downgrade but did assign a "negative" outlook for now to the ratings. As we have noted previously, AGC previously acquired FSA and continues to operate it as a separate insurer. The companies have a lot riding on keeping at least a double-A rating because they are the main bond insurers still guaranteeing new municipal bond deals (especially AGC). Fitch's estimates incorporate an "extremely pessimistic view" of future mortgage-related losses, AGC Chairman and CEO Dominic Frederico said in a statement. He was glad that Fitch noted AGC's ability to mitigate potential future losses and also bolster capital. Standard & Poor's still rates both these insurers AAA with a "negative" outlook. Moody's Investors Service rates Assured Guaranty Aa2 and has it under review for downgrade. As for FSA, Moody's rates it Aa3 and also has it under review. Just about all municipal bonds backed by these two insurers aren't likely to default in the first place and, if they did, both companies are in a position to make good on guarantees.
(Oct. 13) -- Petaluma's credit rating for about $6 million of existing certificates of participation was downgraded to Baa1 from A3 because of the recession and the "recent loss of a major sales tax generator," Moody's Investors Service said. In response, the city had to draw down on a cushion of budget reserves. However, city officials also have shown an ability "to drastically reduce" costs, including job cuts, Moody's said, and Petaluma also has "favorable debt levels" with no plans for more issuance. The city's issuer rating, considered a general obligation equivalent grade, dropped to A2 from A1. The outlook remains "negative" pending more signs that the city can achieve budget stability by fiscal 2011 (which begins July 1, 2010), Moody's said. As we have noted, a recession doesn't mean there will be widespread municipal bond downgrades, but there will certainly be some on a case-by-case basis.
(Oct. 12) -- The Valley Health System's election to let it sell its remaining two hospitals and other assets will be held on December 15, 2009. We have discussed this situation and the bankrupt system's bonds in recent print editions. The proposed sale of almost $170 million to Physicians for Healthy Hospitals "is equal to or greater than the our fair value of the assets" to be transferred, according to an appraisal required when a health care district seeks such a sale. The VHS board of directors approved the sale at an October special meeting. The terms include "payment of approximately $44.7 million in bond debt," according to a Valley Health System news release. If the election fails, VHS might consider selling one of its hospitals (Menifee Valley Medical Center) because that action wouldn't require a public vote. Such a sale of one hospital would also reduce the system's outstanding bonds.
(Oct. 9) -- The Sierra Kings Health Care District filed for Chapter 9 bankruptcy protection the other day as it tries to collect on overdue payments and shore up its cash resources. In response, Moody's Investors Service has downgraded the district's $20 million of general obligation bonds to Ba2 from Baa3 and said that more downgrades are possible. Moody's provided a quick overview of where things stand on the G.O. bonds: "The district made its most recent general obligation bond debt service payment in August 2009, as scheduled. The next payment is due February 1, 2010. As is the usual practice, the levy to make this payment is already in place and the related property taxes will be collected and held by the county prior to remittance to the paying agent for the general obligation bonds. The Bank of New York Mellon Trust Company acts as the bonds' paying agent." Moody's also added this cautionary statement because of the stays that can be issued during a bankruptcy proceeding: "While continued district operations are not necessary for general obligation bond debt service to be levied, collected, and paid, it does raise the specter of a possible temporary disruption of debt service payments. We note that district management does intend to continue operating while in bankruptcy." The district's financial operations "have been severely strained" in recent years while it tried to upgrade its facilities, Moody's added. Moody's also said there is a question about the district's ability to meet contracts for facility improvements because it "appears" some bond proceeds were used for operating, not construction, costs. The district also has been hurt by personnel departures in key leadership positions. Panic selling in the wake of such an announcement usually will get a bondholder nowhere, but in the meantime patience is needed because of the lengthy process involved in reaching a bankruptcy reorganization. The district is located in Reedley, southeast of Fresno. It looks like the district just sold $4 million of general obligation bonds this summer, based on an official statement. It was a high-yielding deal and no doubt many buyers were "big boys and girls."
(Oct. 9) -- Siskiyou Joint Community College District general obligation bonds are now rated A+ by Standard & Poor's after a two-notch upgrade from A-. The district's recent history of "good financial performance despite a challenging state funding environment," along with "strong reserves," prompted the upgrade, S&P said. The district's existing bonds carry bond insurance, so this upgrade pertains to the "underlying" rating (which in some cases is now higher than the insurance rating). It is good once in awhile to note that various municipal issuers are achieving upgrades even during a recession. The Siskiyou district, located near Mt. Shasta and not far from the Oregon border, plans to sell $1 million of general obligation bonds soon.
(Oct. 8) -- The outlook on Riverside County bonds has been altered to "negative" from "stable" by Moody's Investors Service, a move affecting $1.2 billion of bonds. The county's issuer rating is Aa3; pension obligation bond rating is A1, and lease ratings are A2. The depth of the economic recession and the hard-hit real estate market in the area are also hitting the county, Moody's noting, and forcing it to use more budget reserves than it had planned. While the county's debt position "is sound," the "county's inability in recent years to achieve its budgeted results" could eventually affect the credit rating if the trend continues, Moody's said. Even so, Riverside County's "large and diverse" economy suggests that long-term prospects remain favorable for the area, the rating agency said.
(Oct. 7) -- San Bernardino County's bonds have been put on a Watchlist for possible downgrade by Moody's Investors Service, but not exactly for the reason one might think. It isn't the economic slowdown. [Nov. 19 Update: The bonds have been taken off the Watchlist and the outlook is "stable."] Rather, the warning, which affects $1 billion of county bonds, is tied to the termination of a standby purchase agreement on $174 million Series 1998 certificates of participation (Medical Center Financing Project). The purchase agreement was terminated as a result of a recent MBIA Insurance Corp. downgrade, Moody's said. This termination on its own "does not appear to have significant negative implication for the county's liquidity" and is "manageable," the rating agency said. However, there is "uncertainty" over the impact on the county's other variable-rate bonds "and attendant liquidity demands, if any," Moody's added. The county's COPs are rated A3, its pension obligation bonds, A2, and the issuer rating, A1. Sometimes in a situation such as this, the issuer can figure out a solution before a downgrade occurs. (And, the county plans to restructure the 1998 COP issue in coming months, according to Moody's.) The Bond Advisor has never been a big fan of the growth of variable-rate debt and is glad volume has plummeted this year now that fewer financial institutions are able or willing to provide liquidity for the deals.
(Oct. 6) -- The Virgin Islands Public Financing Authority deal mentioned in our October print edition as a tax-exempt candidate offered juicy yields. Of course, the "rum" bonds (tied to an excise tax) also were rated triple-B. If you stayed at the shorter end of the yield curve to reduce risk you received 3.37% in five years and 4.37% in 10 years.
(Oct. 2) -- Our October print edition discusses the possibility that there could still be a positive outcome for the bankrupt Valley Health System bonds. Since we mentioned the downgrade of these bonds to single-C recently, it is worth mentioning some potential upside as well.
(Oct. 1) -- A reader asked about a Southern California Logistics Airport Authority tax allocation bond rating being suspended by Standard & Poor's. We mentioned S&P's concern about the audit of the City of Victorville several months ago in a past print issue, and also ran the following on our "old" Web site on April 9, 2009: "Standard & Poor's has suspended its ratings and underlying ratings on a Victorville tax allocation bond (Bear Valley), Southern California Logistics Airport Authority tax allocation bonds, and Baldy Mesa Water District certificates of participation and improvement bonds. 'These actions result from our inability to obtain up-to-date and independently audited financial statements for these related municipal entities, which are governed by and the financial responsibility of Victorville,' S&P said in a report." Reminder, that S&P action and report occurred several months ago. Victorville apparently has received "clean" audited financials for fiscal 2008 and is working to get its fiscal 2009 numbers out within a matter of months. We will update this matter eventually to see if S&P reinstates its rating at some point.
(Oct. 1) -- A "substantial decline in waste tonnage deliveries" prompted Moody's Investors Service to weigh a possible downgrade of its A3 rating on Merced County Regional Waste Management Authority 2007 Solid Waste Revenue Bonds. While the authority continues to maintain a "satisfactory liquidity position," it will have to use part of a rate stabilization fund to meet a (1.2 times) rate covenant, Moody's said. A "multi-notch" downgrade is possible, Moody's added, but that will depend on how fast the authority can stabilize its finances. There is about $32 million of debt affected by the downgrade warning.
(Sept. 30) -- John Muir Health, which has a dominant market position in the East Bay near San Francisco (including hospitals in Walnut Creek and Concord), plans to sell $102 million healthcare revenue bonds in October. The proceeds will finance capital projects. The bonds will be sold through the California Statewide Communities Development Authority. Moody's Investors Service rates the bonds A1, a bit above the middle of the investment-grade category. Although Moody's has a longer-term "negative" outlook on the health system, the rating agency noted that John Muir has registered improved operating performance in fiscal 2009. Continuing progress on maintaining sound financial reserves could help John Muir avert any future downgrade, Moody's said in a report.
(Sept. 29) -- San Francisco Airport Commission second series revenue bonds were upgraded to A+ from single-A by Fitch Ratings, a move that affects $3.8 billion of existing debt. The higher rating also applies to $1.3 billion of bonds the airport wants to sell. According to a Fitch report, the upgrade "reflects the airport's continued positive performance of both passenger traffic and financial results, despite the current economic conditions, as well as the airport's ability to produce solid financial metrics and debt service coverage levels through economic cycles and industry challenges, such as airline capacity reductions, that are more comparable with peer airports at the 'A+' rating level." In contrast, we noted that Fitch recent cut San Jose's airport bonds by two notches to A-minus because of declining passenger traffic amid a big bond-financed improvement program.
(Sept. 25) -- A broker asked us about a new Los Angeles Unified School District sale of $1.4 billion taxable general obligation bonds. Are these those dreaded taxable Build America Bonds? Yes they are, though we have yet to see a preliminary official statement. We're told the tax-exempt portion will be in the neighborhood of $180 million. If the biggest chunk of the sale ends up being taxable BABs, you can see why tax-exempt yields keep falling (too little supply, too much demand).
(Sept. 24) -- San Francisco's Airport Commission plans soon to sell as much as $625 million of second senior lien revenue bonds in an effort to refund certain existing bonds subject to the federal Alternative Minimum Tax. As we have discussed previously, the federal stimulus act lets certain municipal issuers refinance private-activity debt that had been subject to the AMT (and had been sold from 2004 to 2008). This will lower their borrowing costs. The San Francisco Airport Commission plans to make a voluntary tender offer that could affect various outstanding bonds (for example, Issue 32H, Issue 34C, Issue 34E, and the Series 2008A notes). Holders of this debt should watch for the terms of the optional tender offer. The new bonds will be rated A1 by Moody's Investors Service.
(Sept. 21) -- We mention below that a Riverside County transportation sales tax deal probably will go variable-rate. Does it really matter when you take a look at what some fixed-rate deals are yielding? Los Angeles County's transportation commission sold sales tax revenue bonds last week and an investor had to go out 19 years to get a yield above 4%. It wasn't much better for a water district's certificate of participation sale. Municipal bond funds continue to rake in cash and they have to put that money to work. The result? Collapsing yields, especially on higher-rated deals, but rates also are falling on lower-rated sales.
(Sept. 18) -- The Riverside County Transportation Commission plans to sell $185 million of sales tax revenue bonds, possible as soon as the end of this month. Even though pledges sales tax receipts for this issuer have declined 20% since their 2007 peak, due to the economic downturn, Fitch Ratings notes that this is a strong credit. "Even with two consecutive years of sales tax revenue declines, [the Commission's] relatively low leverage results in very high debt service coverage by historical and projected revenues," Fitch said in a report. Fitch rates the bonds AA. Although this is a good bond to diversify the portfolio of just about any investor, unfortunately it looks like this deal will be offered in a variable-rate mode. Too bad. We need all the fixed-rate tax-exempt munis we can get right now. Speaking of diversification opportunities, Palo Alto plans to sell $35 million of water revenue bonds carrying a triple-A rating from S&P. It's an issuers' market for high-grade deals so the yields will be puny assuming it is being sold tax-exempt.
(Sept. 17) -- Cedars-Sinai Medical Center, which has a major presence as a provider in the Los Angeles area, plans to sell $535 million of fixed-rate bonds in October. The bonds will finance capital projects and leave the Center with about $1.2 billion of outstanding bonds after the sale. However, Cedars-Sinai has been planning for the added debt for several years and this sale already is incorporated into the current A2 credit rating, Moody's Investors Service said in a report. The bonds will be offered through the California Health Facilities Financing Authority.
(Sept. 16) -- We were doing a little catching up on rating actions outside the typical "traditional" municipal bonds and stumbled across a five-notch downgrade by Standard & Poor's of about $59 million of tax-exempt tobacco settlement bonds in California. The downgrade was tucked away in a release from a few days ago that took certain muni tobacco bonds off a watch list for downgrade, but assigned a "negative" outlook to the bonds because of potential longer-term downgrade risk in future years. While most of those bonds held on to low investment-grade ratings, that wasn't the case for the $59 million California County Tobacco Securitization Agency (Gold Country Settlement Funding Corp.) Series 2006 issue. The 2006A and 2006B classes were cut to B+ with a "negative" outlook from BBB. Why was this deal penalized when other issues were not? It has to do with this deal's unique structure, according to S&P: "In our view, Gold Country Settlement Funding Corp. is unlike the other affected transactions in that it has payment priorities such that the B class capital appreciation bond receives principal payments, while the A class current interest-paying bond is locked out from any principal distributions until the B class is paid in full. Failure to pay principal at maturity constitutes an event of default (EOD) under the transaction's indenture, and if an EOD occurs, principal payments are distributed pro rata among the classes. Our assessment of the combination of the transaction's structure and more stressful assumptions resulted in the downgrade of both classes to B+."
As for the other deals that escaped downgrades but now have a longer-term "negative" outlook, S&P had this to say: "The negative outlooks reflect our opinion that significant industry and litigation event risks will likely be present in these deals for approximately five years or more." Remember, these municipal tobacco bonds are backed by a settlement with certain major tobacco companies and the revenue can vary depending on future cigarette consumption, etc. Among the deals with a "negative" outlook is California's $4.4 billion Golden State Tobacco Securitization Corp. Series 2007 issue, which is still rated BBB. So, these deals escaped a downgrade for now, but the long-term risks of tobacco-related revenue continue to raise concern for muni tobacco bonds with longer maturities into the 2030s and 2040s. Of course, as we noted in September's print edition, a powerful rally in some lower-rated bonds also helped muni tobacco debt make an incredible comeback (some yields dropped about two full percentage points in a month). By the way, three classes in the San Diego County Tobacco Asset Securitization Corp. Series 2006 issue also were downgraded by S&P, but only by one notch. The 2006B bond dropped to BBB- from BBB, the 2006C bond fell to BB+ from BBB-, and the 2006D fell to BB- from BB. The other classes stayed at BBB.
(Sept. 15) -- San Jose's $1 billion of airport revenue bonds were downgraded two notches by Fitch Ratings because passenger enplanements have dropped 17% since 2007, the rating agency said. The rating dropped to A-minus from A-plus. The outlook is "negative." Three years of enplanement losses beyond Fitch's expectations spurred the downgrade, the rating agency said, along with a doubling of the airport's debt for the terminal area improvement plan. Enplanements by 2010 could be 20% below what the airport's 2007 financial plan projected, Fitch said. The current economic environment is cited as one reason the San Jose's passenger traffic has declined back to fiscal 1995 levels. San Jose's airport also has to compete with nearby airports in Oakland and San Francisco, Fitch added.
(Sept. 14) -- A Moody's Investors Service report recently noted that most California school districts will probably avoid downgrades, even during the current tougher times. Of course, there are always exceptions, and here is an example of one of them. Fitch Ratings downgraded $64.6 million of Natomas Unified School District general obligation bonds to BBB from A-minus and put them on a watchlist for another possible downgrade. Here is what Fitch said: "The downgrade reflects the district's deteriorating financial position, as evidenced by a significant structural imbalance and projected year end deficit balances for fiscals 2010-12. With the weakened financial position brought on largely by misestimates of student enrollment and reduced state funding without commensurate spending cuts, Fitch believes the district's ability to achieve balance and rebuild reserves will be hindered in the future by the area's significantly impacted housing market and a local moratorium on new home building." (This school district is in Sacramento and also crosses outside the city's boundaries.) While the home building moratorium might be lifted down the road once certain flood-control improvements are in place, the rating agency noted that the school district could be doing a better job of overseeing existing resources. "Fitch views negatively management's inability to date to adequately reduce expenses, obtain labor concessions, or project student enrollment growth accurately going forward. Also, current labor agreements require that certain savings be reallocated to labor, an impediment to rebuilding reserves."
(Sept. 10) -- See our September print edition for the answer to the above question. Hint: Narrowing credit spreads are affecting some bonds more than others.
(Sept. 9) -- Ridgecrest Redevelopment Agency 1999 Tax Allocation Refunding Bonds were upgraded to Baa2 from the lowest investment-grade rating (Baa3) by Moody's Investors Service. The recovery of the Ridgecrest Redevelopment Project Area, which covers almost the entire city, has resulted in steady growth for assessed valuation that backs the bonds, Moody's said. The late 1990s represented a time of fiscal challenge for the area, but Ridgecrest is benefiting from added jobs at Naval base at China Lake, Moody's said. There are "strong prospects for continued incremental assessed valuation growth going forward," the rating agency added.
(Sept. 9) -- The "underlying" BBB+ credit rating for King City Union Elementary School District general obligation bonds now has a "positive" instead of "stable" outlook, Standard & Poor's said. The district "has taken sufficient steps" to rebuild its general fund balance after dealing with various weaker credit factors in fiscal 2008, S&P said. The district also benefits from a state oversight system that provides technical assistance during times of fiscal distress, S&P added. The bonds are guaranteed by National Public Finance Guarantee Corp., the MBIA subsidiary.
(Sept. 8) -- Bankrupt Valley Health System was downgraded to single-C from double-C by Fitch Ratings because of continuing losses and an uncertain future. (The system's board of directors is considering selling off two more of the system's hospitals.) We have written about this system several times in the past, including the sale of one of its hospitals that paid off certain bonds. Our September print edition discusses the downgrade at more length. The affected bonds are $4.9 million hospital revenue bonds Series 1996A (refunding and improvements project) and $40.6 million certificates of participation Series 1993 (refunding project). Beside continuing losses, the health system also hasn't replenished debt service reserve funds as projected, Fitch said, raising a question about how it will meet a Nov. 15, 2009, debt service interest payment.
(Sept. 3) -- The El Monte City School District, which is ready to sell $28 million of general obligation bonds, was upgraded to A+ from single-A by Standard & Poor's. "The raised rating reflects our view of the district's good reserve levels and good financial management practices," S&P said. "Further supporting the rating is the district's location and participation in the greater Los Angeles economy." Moody's Investors Service rates the bonds A2.
(Sept. 2) -- San Francisco's Series 1994 collateralized single-family bonds are on a Standard & Poor's watch list for possible downgrade while the rating agency explores an unexpected asset-to-liability ratio. The bonds are rated AAA currently. According to S&P, information received from the trustee indicates that assets total a bit more than $1.09 million and the term bond liability is a tad above $1.12 million. That results in an asset-to-liability ratio of 97.84%, S&P said. The rating agency said "it is currently working with the issuer and trustee to determine what caused this to occur and how this will be resolved." We would imagine a prominent issuer such as San Francisco will in fact get the issue resolved in a satisfactory manner.
(Sept. 1) -- The other day the Compton Community College District sold general obligation bonds that include an A-minus rating from Standard & Poor's. A five-year bond yielded 4.06% and a 10-year maturity, 5.20%. The second-part of our August print edition ponders some other enticing opportunities in the current tax-exempt market thanks to current "credit spreads," but this deal is even more proof that income-oriented investors can do well with some basic research and common sense. You had to buy a 31-year bond in the recent University of California sale to get a yield above 5%.
(Aug. 19) -- The University of California Regents priced more than $1 billion of municipal bonds the other day. As we complain on our home page, however, most of the deal came as taxable Build America Bonds. The tax-exempt portion (rated Aa1 and AA) featured a 2.06% yield in 2014, a 3.32% yield in 10 years, and a 4.05% yield in 15 years. A 20-year maturity yielded 4.47% and a bond due in 2040 yielded 5.02%. It is rather instructive to look at the chart of yields for other recent sales (go here and scroll down) and see how a higher-quality issuer benefits in today's market. The UC deal could get away with far lower yields than other lower-rated issues.
The taxable Build America Bonds mature in 2031 and 2043 and included a top yield of 6.20%. The tax-exempt bonds were far more attractive for individual investors once you do the Taxable Equivalent Yield math. However, the federal government is subsidizing these taxable BABs to the tune of 35% of the interest expense. From an issuer's standpoint, it is cheaper to sell the taxable debt after you include the attractive giveaway of federal funds.
(Aug. 17) -- As of August 2009 we have revamped our web site's appearance. We haven't, however, even begun to start adding all the content that is planned in coming weeks and months. For example, this "Bond Updates" page will soon include new content. The site revamp was delayed when one of our key "helpers" was sidelined for a time by a serious illness. We are glad to say he is back and in coming days and weeks we will add much more content and other features. Bear with us for a few days as we begin with some bare-boned pages.
For now, at least, we are keeping some of the same categories we used at our site in its previous format. Over time, however, we plan to refine some of these pages once a subscriber-only section is added.
Our "print" edition remains the main vehicle each month to receive analysis and news about the key trends driving California's municipal bond market. Individual investors in municipal bonds are rarely served by reacting to day-to-day "crises" that always seem to loom just around the corner. During this year of fiscal distress for California and its localities, we have lost track of how many "panic-driven" stories warned of municipal bond defaults, etc.
We aren't downplaying some of the legitimate concern, but just reminding readers that municipal bonds aren't stocks, nor for that matter are they corporate bonds. Munis have their own separate history regarding defaults, workouts, and solutions when troubles arise. For traditional tax-backed and revenue-backed bonds, this history has served investors well, though we can always point to exceptions. Even riskier parts of the muni market have been safer than other fixed-income options, though at times defaults do in fact rise.
The updates coming to this site in coming days and weeks and will flesh out what we mean.