Azusa, Calif.'s Water Revenue Bonds Fall to A2

Moody’s Investors Service downgraded Azusa, Calif.’s water revenue bonds to A2 from A3 Nov. 26 citing the weak financial position of the city.

The downgrade impacts $54 million of Series 2006 bonds issued by the Azusa Public Financing Authority for the water system capital improvement program, according to the ratings report.

The bonds are secured by installment payments made by Azusa to the authority that are a special obligation of the city and are secured by the net revenues of its water system.

Budget documents for fiscal 2012 show considerable variation between the adopted budget, the final budget, and the audited results, which analysts said weakened their confidence in the operating surpluses the city is expecting for fiscal 2013 and fiscal 2014.

The city used short-term loans from the water enterprise fund for government operations in fiscal 2012, and is expected to continue this practice.

In February report, Moody’s downgraded the city’s issuer rating to A3 from A2 and Series 2002 refunding COPs to Ba1 from Baa1 and assigned the ratings negative outlooks.

The downgrade of the parity revenue bonds, Series 2006 to A2 reflects the risks to the water system’s credit profile due to the weak financial position of the city, analysts said.

The city continues to have very weak general fund liquidity and will likely continue to have budgetary pressures and continued budgetary imbalance, according to the report.

According to Moody’s analysts, the city’s weakened financial position increases the likelihood the city could increase borrowing from the water system, which would limit the system’s financial flexibility.

Another concern analysts cited is that the risk of immediate principal acceleration is heightened in the unlikely event that the city seeks bankruptcy protection and/or defaults on an installment payment to the trustee.

Changes that could improve the rating are more diversity in water customers, improved and sustained financial picture and debt service coverage and evidence of greater independence from city operations and city financial borrowing.

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