California Off Negative Fitch Watch; BBB Affirmed

SAN FRANCISCO - Fitch Ratings removed California from negative watch yesterday, while affirming its BBB rating and assigning a stable outlook.

In an eight-day period, all three rating agencies have removed California from negative watch status, while affirming ratings - A from Standard & Poor's, and Baa1 from Moody's Investors Service.

Fitch said its removal of California bonds from negative watch reflected the state's actions to resolve its severe near-term cash-flow imbalance.

California in July adopted budget revisions to close a forecast $24.2 billion general fund gap, while supplying enough cash flexibility to allow the state to cease issuing IOUs to many creditors, as it has been doing since July 2 to ensure that it had enough cash to make its highest legal priority payments, such as those to bondholders.

The state is raising cash through this week's $1.5 billion private placement of revenue anticipation notes with JPMorgan, which are to be taken out in September when the state issues Rans in the public market, with JPMorgan as manager.

California is planning to issue up to $10.5 billion of Rans, though Fitch, in its release, noted the state is expecting to issue $7.8 billion, presuming lawmakers can pass $2.7 billion in additional cash management measures.

Fitch said the BBB rating level is low for a state, while the stable outlook incorporates severe economic and fiscal challenges California continues to face.

"The state's economy is in the midst of a recession of historic magnitude, one affecting virtually all sectors and regions of the economy and severely reducing revenues," according to Fitch.

The rating agency noted that the state's credit position faces risks from its ability to sustain deep spending reductions, and the recent budget package's reliance on many one-time measures.

"Several components of the plan are already subject to legal challenge, such as the state's use of $1.7 billion in redevelopment agency funds for general fund purposes, and other assumptions in the plan, including the $1 billion sale of the state's workers' compensation insurance fund, may not be realized by fiscal year end," according to Fitch.

"Further revenue underperformance or the failure of enacted budget solutions could reopen current-year gaps and raise the prospect of a return to the prolonged and contentious deliberations that have marked the state's response to fiscal challenges."

In connection with Fitch's affirmation of California's BBB GO rating and its removal from negative watch, the agency also removed the state's appropriation-backed bonds from negative watch and affirmed their BBB-minus rating.

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