SAN FRANCISCO – Ratings agencies are warning that the uncertainty over the elimination of California’s redevelopment agencies could impact debt payments and lead to a rash of downgrades.
Standard & Poor’s Wednesday became the latest to weigh in after it said it may cut the ratings on five redevelopment agencies because of the uncertainty surrounding the legislation that shutters the agencies.
Fitch Ratings said Tuesday it has placed all California tax allocation bonds on review for potential downgrade due to risks to bond indentures stemming from a new law eliminating redevelopment agencies.
“The Rating Watch Negative reflects Fitch’s belief that recently implemented state legislation creates a heightened risk at all rating levels that the flow of funds to holders of tax allocation bonds may be inconsistent with the requirements of bond indentures,” Fitch analyst Karen Ribble said in a report.
According to Interactive Data, 378 California redevelopment agencies have $19.8 billion of tax allocation bonds outstanding.
Last week, Moody’s Investors Service downgraded $11.6 billion of tax allocation bonds rated above Baa2. It said it would lower the credits by one notch due to concerns about bond payments as the state’s redevelopment agencies are phased out.
Standard & Poor’s analyst Sussan Corson said the new legislation has the potential to lead to fluctuating interest rates and demand for variable rate debt, which could be harder to manage under the new law.
S&P put the San Pablo, Pittsburg, Manteca, Morgan Hill and Menlo Park redevelopment agency’s on watch for possible downgrade.
It also changed its outlook on tax allocation bonds issued by another two agencies - the Vista Community Development Commission and the Inland Valley Development Agency - because the new legislation creates uncertainty related to market access and scheduled financing.
Fitch said concern about the bond indentures is partly because of the short time frame redevelopment agencies and local governments will likely have to implement the new legislation. It also noted the legislature’s lack of progress in resolving the inconsistencies and uncertainties in the law.
Fitch said in its report that it has “gained a measure of comfort” from discussions with state and local officials that the state controller’s office would provide guidelines to help clear up some of the ambiguity.
“While the intent to uphold existing obligations is clearly stated in the legislation, the mechanics of implementation are not,” Ribble said.
Fitch said that over the next several weeks it will review legislative and administrative actions to insure they protect bondholder payments.
The redevelopment legislation outlines a complex process to eliminate and hand over redevelopment debts and assets to a “successor agency,” which is likely to be the former municipality that oversaw the agency.
The process involves oversight and review of redevelopment finances by a local oversight board, county auditor-controllers, the state controller’s office and the state Department of Finance.
Fitch said it will be closely monitoring how the process is implemented on the local level.
In October, Standard & Poor’s said more than a dozen redevelopment agencies’ that have already been struggling were particularly at risk from the legislation.