LOS ANGELES -- Standard & Poor’s upgraded California’s economic recovery bonds to AA from A-plus.
The rating applies to $4.58 billion of outstanding bonds. The outlook is stable.
“Our rating revision reflects, in particular, the ERBs’ indenture requirement that any above-forecast pledged special sales tax revenues be used for early redemption of outstanding bonds,” analysts said a report released Nov. 20. “This structural feature amplifies, in our view, the beneficial effects of strengthening special sales tax revenue collection trends on the ERBs’ credit quality.”
During fiscal years 2012 and 2013, California redeemed early more than $1.66 billion, or about 26%, of the ERBs that were outstanding as of Oct. 11.
Standard & Poor’s said the early pay downs support consistently strong, and strengthening, debt service coverage ratios from regular special sales tax revenue collections trends, even if they were to level off going forward.
The rating also reflects the agency’s view of the state’s very large and diverse tax base, above average income levels supporting sales tax collections, and the restriction against the sale of additional parity ERBs.
“The stable outlook on the ERBs reflects our view that the pledged revenues will likely continue to improve and provide strong coverage, which would likely be sufficient even in the event of a material decline in special sales tax revenues,” Standard & Poor’s said.
Voters passed Proposition 57 in 2004, authorizing $15 billion of economic recovery bonds, dedicating a quarter-cent from the state sales tax to the debt, which was used to patch the state’s budget shortfalls.