NEW YORK - Moody's Investors Service said it has downgraded to A1 from Aa3 the ratings on Sacramento Regional County Sanitation District, Calif.'s senior lien obligations totaling approximately $1.07 billion; and the rating on the district's subordinate lien variable rate refunding revenue bonds, series 2008A-E to A2 from A1.
The outlook on the district's ratings remains negative.
The downgrade reflects the district's continuing, weak financial results, both current and projected.
The district's service area surrounding the state capital is undergoing stress as a result of the residential real estate market decline and the economic recession, but its long-term fundamentals are sound.
The district's strong cash position is integral to the current ratings: in addition to providing a financial cushion, these reserves mitigate the district's large variable rate debt and swap exposure.
Given the availability of this liquidity, the district's complex debt and swap portfolio remains a modest negative factor in the rating. The negative outlook reflects the fact that the district is expected to raise rates sufficient only to generate debt service coverage at the covenant levels including rate stabilization fund draws.
The resulting income remaining after debt service is not sufficient to sustain the system, and the district in fact projects drawing down its reserves in coming years.
The district believes these projections to be conservative. As currently projected, the trend of continuing weak finances and narrowing reserves will certainly put downward pressure on the rating.
