Standard & Poor's Ratings Services said it lowered its rating to on Desert Hot Springs Redevelopment Agency, Calif.'s merged project area (MPA) series 2006 and 2008 tax allocation bonds (TABs) to CCC-plus from B.

The outlook is stable.

"The downgrade reflects our view of continued assessed value declines and the need for further draws on the reserve fund, which could potentially lead to a default in the next few years, assuming no assessed value growth in the near future," said Standard & Poor's credit analyst Michael Stock.

The rating incorporates the successor agency's (SA) reliance on some of the debt service reserve to meet projected shortfalls. The stable outlook reflects the presence of a cash-funded debt service reserve and escrowed bonds, which the agency estimates can cover annual shortfalls for several years before depletion, assuming project area assessed value (AV) remains stable.

The rating reflects: significant and continuing AV declines in the MPA since fiscal 2008; the potential use of a portion of the cash-funded debt service reserves due to inadequate, 0.82x annual debt service coverage by pledged revenues in fiscal 2013 and inadequate coverage of 0.6x maximum annual debt service (MADS) in fiscal 2015; the MPA's high volatility ratio of 0.4; and very high unemployment levels and low income indicators in the city.

Securing the bonds are tax increment revenues from redevelopment agency's MPA net of the 20% of increment set aside for low- and moderate-income housing projects and senior pass-throughs.

The stable outlook reflects the presence of a cash-funded debt service reserve and escrowed bonds, which the agency estimates can cover annual shortfalls for at least another year. S&P projects the need for further draws on the reserve fund, which could be depleted and lead to a default in the next two-to-three years, assuming no AV growth in the near future.

Although the agency doesn't expect to change the rating in the next year, should AV continue to decline or should the SA draw significantly on cash-funded debt service reserves in the next year, it could lower the rating. Should AV stabilize and recover to improve annual coverage, it could raise the rating.

The MPA is in Desert Hot Springs, in California's Coachella Valley. The city attracts tourists for its natural hot mineral water spas and is a historically lower-income community, neighboring Palm Springs and other more affluent resort communities.

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