Fitch Ratings dropped the rating on Fresno, Calif.'s subordinate water revenue bonds to A-plus from AA-minus, with a negative outlook, based on weakened system fundamentals.

The downgrade affects $147.9 million of debt. Fitch affirmed the senior lien water bonds at AA.

"The downgrade primarily reflects weakened water fund liquidity, expectations for reduced debt service coverage/increased leverage and economic pressures on the service area," Fitch analysts wrote in a ratings report.

The city's water utility is a monopoly provider of essential water services to California's fifth most populous city, located in San Joaquin Valley. Fitch said the city benefits from an ample water supply that is affordable and should be adequate for future growth needs.

The utility's financial performance has been very strong in recent years, but coverage and liquidity is likely to decline as the utility makes large investments in surface water treatment capacity, according to Fitch.

"The city of Fresno's use of water resources to finance general fund cash flow needs and the accumulated deficits of the city's ailing parking enterprise also weighs on the rating and is the primary reason for the maintained negative outlook," analysts said.

The A-plus rating assumes some degree of general fund financial stress and ongoing intra-year cash flow support, but Fitch said it could further downgrade the rating if deterioration in general government financial performance leads to increased borrowing from the utility.

Fitch views the utility's debt burden as above average and expects it to more than double over the next five years.

The agency also affirmed the city of Fresno's underlying general obligation rating at BBB-plus, with a negative outlook.

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