Fitch Ratings places the following tax allocation bonds (TABs) for the Atwater Redevelopment Agency, CA (the RDA) on Rating Watch Negative:
--$1.6 million TABs, series 1998A, 'BBB+';
--$7.3 million TABs, series 2007A, 'BBB+';
--$2 million taxable housing TABs, series 2007B, 'BBB+'.

The non-housing series 1998A and 2007A bonds are secured by gross tax increment within the sole project area, net of the 20% housing set-aside and county administrative fee. The housing bonds are secured by the 20% housing set-aside. The debt service reserve requirement is being met through a Radian surety bond.

KEY RATING DRIVERS POOLED CASH CONCERNS: The Rating Watch Negative reflects Fitch's concerns over the level of commitment by the city, as successor agency to the RDA, to honor legal provisions requiring segregation of funds pledged to TAB bondholders. The city reports pooling funds allocated from the real property tax trust fund to the successor agency under the state's AB X126 with other funds of the city. The city's high level of fiscal stress leads to concerns about the standing of debt service among the city's priorities.

THREAT OF FISCAL EMERGENCY: The city's consideration of the declaration of a fiscal emergency is a possible prelude to the city entering into confidential negotiations with creditors under California's A.B. 506 process and/or seeking Chapter 9 bankruptcy protection. Fitch continues to believe that pledged revenue would be considered special revenue under Chapter 9 of the U.S. Bankruptcy Code. In a fiscal emergency the treatment of such revenue is less clear. However, city officials report their intent to shortly transfer funds to the trustee for the Dec. 1, 2012 principal and interest payment.

SATISFACTORY COVERAGE FROM A LIMITED BASE: Both housing and non-housing bond coverage is about 1.7x. Fitch believes this level is consistent with the current rating level because of the project area's small size and concentration, despite only moderate recent tax base declines.

MODEST TAX BASE DECLINES: The city's assessed value (AV) declined a modest 1.3% in fiscal 2013, consistent with Fitch's expectation.

WEAK LOCAL ECONOMY: The local economy is very weak. This is reflected by a 17.6% unemployment rate in May 2012, severe city-wide AV declines, low income levels, and a distressed
housing market.

WHAT COULD TRIGGER A RATING CHANGE PROLONGED FISCAL EMERGENCY: While Fitch believes it is likely that revenue for the upcoming debt service payment will be transferred to the trustee, lack of clarity as to the status of future payments could lead to a downgrade.

LACK OF WILLINGNESS: Any indication of consideration to use pledge revenue for operating purposes would likely result in a significant rating downgrade.

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