LOS ANGELES — Fitch Ratings upgraded to investment grade $250 million of water revenue bonds issued by the Stockton Public Financing Authority, Calif. despite ongoing uncertainty from the city's bankruptcy.

Fitch upgraded $55 million of variable rate demand bonds, series 2010A, $24.2 million of series 2005A bonds, $15.5 million of series 2009A bonds, and $155 million of series 2009B bonds to BBB from BB-plus.

The bonds were originally issued to fund the Delta Water Supply Project, which has been completed. The project supplies Stockton with a high-quality, reliable water supply and includes a new intake and pump station that diverts water from the San Joaquin River.

"The upgrade and stable outlook reflect the system's lower risk profile stemming from the planned conversion of the 2010A bonds to fixed rate from variable rate, which would eliminate risks associated with the letter of credit," Fitch analysts said in a report. "The system's debt profile will be entirely fixed-rate after the conversion."

The bonds had previously been on rating watch negative.

The series 2010A bonds will be converted to fixed rate with pricing expected around Sept. 24, Fitch said.

Analysts also noted the water system's adequate financial profile and elevated leverage, but manageable capital.

"Fitch remains concerned about potential event risks that may arise during the city's bankruptcy period that could negatively impact the financial health of the system or the ability of the system to make full and timely payment to bondholders," analysts said. "However, the general protection of water utility revenues from bankruptcy discussions to date and Fitch's general view of the special revenue status of pledged revenues tend to mitigate these concerns."

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