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Sweetwater UHSD, Calif., GOs Downgraded to A1 by Moody's

Moody's Investors Service said it has downgraded the general obligation rating of Sweetwater Union High School District, Calif., to A1 from Aa3 and has also downgraded the rating on the district's outstanding certificates of participation, Series 2001 from A1 to A3.

Moody's has also assigned an A1 rating to the district's 2013 general obligation bond anticipation notes totaling approximately $36.7 million.

The notes are secured by the proceeds of general obligation bonds which are anticipated to be sold prior to note maturity on January 1, 2018.

Proceeds from the current offering will be used finance construction projects at the Montgomery High School and the National City Middle School.

The one-notch downgrade of the district's general obligation rating to A1 from Aa3 reflects the continued deterioration of the district's finances in fiscal 2012 after two years of deficit spending and the district's pressured ending cash balance levels that continue to remain low after several fiscal years. Some of the district's economic factors have always been below the medians for the rating category and the district's gradual financial decline in connection with its historic economic weaknesses have affected the district's credit profile.

The downgrade of the district's certificates of participation, Series 2001 to A3 from A1 reflects the two-notch rating distinction given between the district's lease-backed obligations and its A1 general obligation rating, notwithstanding the revenue stream dedicated to make debt service payments.

The two-notch distinction off the district's general obligation rating represents the weaker security pledge for lease-backed obligations and reflects the additional risk to bondholders from the county's financial, operational, and economic conditions over the more secure general obligation pledge. A "lease pledge" is a contractual obligation, conditioned on use and/or occupancy of the least asset, effectively on parity with a county's other unsecured obligations.

The A1 rating assigned to the district's 2013 general obligation bond anticipation notes (BANs) reflects the district's recent market access in 2008 and sound long-term credit profile. The district currently has available bond authorization and existing debt and tax rate capacity to issue the take-out financing for the notes. The 2013 BANs mature in five years on January 1, 2018, but have an optional redemption after three years. The district will determine after three years whether or not to take-out the financing at that time or wait until maturity. The district has covenanted that it will issue renewal notes after maturity if the district is precluded from issuing take-out financing for the notes.

Key considerations for the district's A1 general obligation rating very large and diverse tax base that has remained relatively stable throughout the economic downturn; below-average socioeconomic profile; weakening balance sheet, characterized by continually declining total reserves and low ending cash balances; and low debt levels that are projected to increase slightly with the take-out financing of the current BANs.

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