LOS ANGELES — San Diego Association of Government officials are upset over a one-notch downgrade of their bonds by Moody’s Investors Service.
Moody’s dropped SANDAG to Aa2 from Aa1 Wednesday, affecting $1.2 billion of sales tax-supported debt issued by the San Diego County Regional Transportation Commission. The outlook is stable.
Marney Cox, SANDAG’s chief financial officer, was surprised by Moody’s downgrade of the regional transportation agency.
SANDAG plans to price $300 million of new money and refund $86 million on May 23, with a closing expected on June 14.
According to Cox, the agency’s financial advisors said that an Aa2 rating from Moody’s will have minimal effect on pricing on the nearly $386 million of combined new money and refundings.
Standard & Poor’s has given the agency a AAA.
Barclays Capital will act as lead underwriter, aided by co-managers Goldman, Sachs & Co., JPMorgan, Morgan Stanley and Bank of America Merrill Lynch.
They expect to achieve an all-in interest rate of 4% to 4.2%, according to Cox.
“A piece of it is refunding,” the CFO said. “We won’t know how much until marketing is underway. We have some outstanding variable-rate bonds. We are going to unwind some of the early maturities on those and replace it with fixed-rate debt.”
The goal will be to achieve sufficient savings to cover the costs of unwinding the bonds, Cox said.
Since the market currently looks unfavorably on variable-rate debt, SANDAG wants to do all it can to limit the amount it holds, he said.
“It would be eight to 12 years worth of unwind,” he added.
SANDAG’s income comes from a half-cent sales tax, which is much different from the way other entities rated in the same pool fund projects, Cox said.
San Diego County voters in November 2004 approved a 40-year extension of TransNet, a half-cent sales tax that funds local transportation projects. The volatility that exists when bonds are backed by sales tax raised the most concern, according to the Moody’s report.
Analysts compare local bond issuers to others who are like-sized and look at how economic factors at the local, state and federal level are likely to impact the agencies they rate, said Eric Hoffmann, a San Francisco-based Moody’s analyst.
“I think the agency’s debt-service coverage ratio will be over 3.5 with the new bond issue — we are over 4 now,” Cox said. “Of all the Aa1 agencies, ours ranks with the best of them. To be downgraded is the surprising part.”
It isn’t SANDAG’s debt ratio that caused the most concern, but rather the volatility of its revenue source, sales tax, which tends to rise and fall based on economic conditions, according to Moody’s.
When analysts compared SANDAG to other Aa1 issuers, it found that the agency’s bonds don’t have the same metrics as other similarly rated bonds, which was the reason for the downgrade, said Moody’s Kevork Khrimian.
Hoffmann said, “The downgrade was not a function of the bond program or how much borrowing is anticipated. … It was a function of the sales tax history and its volatility compared to other Aa1-rated credits over time.”
During the downturn, the regional planning agency experienced three years of declining revenue from the sales tax that funds its projects, but at this juncture it has seen two years of sales tax revenue growth, Cox said, up 8.4% growth during fiscal 2011 and more than 7% for fiscal 2012.
“Here we are on the mend, the economy is looking good and they downgrade us,” he said.
“We are looking at ratings long-term,” Hoffmann said. “One year’s performance doesn’t determine where the rating should be.”
