NEW YORK - Standard & Poor's Ratings Services said it lowered its underlying rating (SPUR) two notches to CC from CCC on Hercules Redevelopment Agency, Calif.'s series 2005 and 2007A tax allocation bonds (TABs).

The outlook is negative.

“The downgrade reflects our assessment of the agency's use of the Ambac Assurance Corp. surety reserve to fund a $2.4 million debt service payment on Feb. 1, 2012,” said Standard & Poor's credit analyst Sussan Corson. “The outlook remains negative reflecting our expectation that pledged revenue will remain insufficient to cover nonhousing debt service obligations and remaining surety reserve funds could be depleted in the next one-to-two years,” Corson added. 

The SPUR also reflects:  

-- Significant drops in the agency's project area assessed value (AV) in the past four years, which have led to declining tax increment revenue and about 0.7x maximum annual debt service (MADS) coverage, including annual pass-through payment obligations to Catellus Development Corp.;  

-- Continued concentration in the largest taxpayer, Bio-Rad Laboratories Inc. (BBB/Stable), which makes up 16% of fiscal 2012 incremental AV; and

-- The fact that the nonhousing-secured series 2005 and 2007A bonds' debt service reserve is funded by sureties from Ambac (not rated). The series 2007A and series 2005 bonds are secured by tax increment revenues collected from the agency's merged project area net of set-asides for low- and moderate-income housing and certain senior pass-through payments.

The project area is in the western portion of Hercules, adjacent to the San Francisco Bay in Contra Costa County, and covers a former industrial area, including a central portion historically centered on explosives production. The merged project area covers 826 acres and consists of two areas--the original Dynamite project area and an amendment area, project area No. 2. 

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