California Economic Recovery Bonds Upgraded to Aa2 by Moody's

Moody's Investors Service said it has upgraded the rating on the state of California's economic recovery bonds to Aa2 from Aa3.

The outlook on the bonds is stable.

About $5.2 billion of debt is outstanding.

The upgrade is based on two years of strong growth in pledged revenues and an expectation of strong growth in the current year and the next few years, combined with a very strong legal structure that includes a closed lien and a turbo feature which will pay down bonds and increase coverage going forward.

The Aa2 rating is a reflection of the strong legal structure and healthy coverage levels based on conservative revenue forecasts, as well as the expectation that the revenue growth will continue to be strong for the life of the bonds.

The closed-loop feature of the bonds will allow the coverage to continue to increase as excess revenues are used to redeem bonds early, with bonds likely to be fully redeemed by 2017. The legal separation of the revenues from the general fund allows the credit to achieve a rating higher than that of the general obligation rating of the parent government; the state's general obligation debt is rated A1 with a stable outlook.

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