LOS ANGELES — Bond disclosures required under California Senate Bill 2019 may improve S&P Global Ratings' view of issuers' credit quality, analysts wrote in a ratings comment.

Senate Bill 1029, sponsored by State Treasurer John Chiang, requires the state's issuers to step up disclosure of their bond payments and use of proceeds. The governor signed the law in September and it takes effect in January.

The law was enacted following a San Francisco case in which bond proceeds were embezzled.

The implementation of SB-1029 could have a positive effect on S&P's view of the issuer's overall financial management assessment by focusing attention on a debt management plan, one of the seven factors the rating agency considers in assessing the FMA, S&P analysts wrote in a Nov. 22 report.

"The reporting mechanisms embedded within SB-1029 signal a step in the right direction toward increased transparency," wrote S&P Analysts Sarah Sullivant and Li Yang. "However, the specifics of any debt management policy will ultimately determine the potential effect on individual issue-level ratings."

The legislation requires issuers of local government and school district securities to certify the local adoption of a formal debt management policy no later than 30 days prior to the sale of any new issuance, beginning on Jan. 1, 2017.

The FMA is a key part of the rating agency's general obligation bond rating criteria, analysts said.

S&P evaluates a debt management policy by assessing: metrics for affordability; the method of issuing debt; maturity length and debt service structure; use of security and pledges; credit enhancement and derivatives; and debt refunding.

Issuers that create well-defined debt policies with strong reporting and monitoring as a result of the law could also end up with enhanced FMA assessment, analysts said.

The law also requires issuers to submit an annual report to the California Debt and investment Advisory Commission regarding new debt issuances that includes the use of bond proceeds. But issuers will not be required to file that report until January 2018 – and only if they issue debt in 2017 since the legislation is not retroactive.

S&P Global analysts described the information reported to the state prior to the new law, which included notifying CDIAC of proposed bonds sales and when those sales had closed, "as primarily for statistical tracking."

 

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