Fire-ravaged California town's pension bonds snag an upgrade

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Taxable pension obligation bonds issued by a California conduit that feature a high concentration of debt from the fire-ravaged town of Paradise received an upgrade to a higher grade of junk and a positive outlook from Moody’s Investors Service.

Moody’s upgraded the underlying rating on the $19.3 million 2007 A-2 POBs sold as capital appreciation bonds by the California Statewide Communities Development Authority to Caa2 from Caa3 Wednesday.

Money deposited by Paradise Aug. 1 for the bond payment due June 1, 2020 was cited by the ratings agency in the ratings boost and revised outlook. The rating agency also noted that the bonds are insured by Ambac.

The Legislature passed a bill that provides Paradise with backfill payments for lost property taxes for three consecutive years.

“The town’s ability to make this payment was based on the receipt of [non-bond] insurance settlement funds and state backfill payments from the State of California for the lost fiscal 2019 general fund revenues,” Moody’s wrote. “The heavy physical and economic damage to the town of Paradise has devastated its financial position, realistically eliminating any short-term ability to pay debt service, except with one-time funding sources such as those used for the recent deposit with the trustee.”

The town’s tax base was almost completely destroyed by the November 2018 Camp Fire, according to the ratings agency.

Figures released by the state in June showed the town has lost about 90% of its population of 27,000.

“The town's ability to make the subsequent payments remains limited and will depend on the town's willingness to prioritize its use of unrestricted funds for debt service over its operational needs,” Moody’s wrote.

The next possible default would be for a payment due to bondholders on June 1, 2021. Even if the city defaults in 2021, Moody’s wrote, bondholders are likely to be made whole, as the debt is insured by Ambac.

Paradise has a declining share of the pool over time, but remains a material share through final maturity in fiscal 2031, with Port Hueneme being the only pool participant in fiscal 2032 through fiscal 2035.

The rating is based on what Moody’s called its “weak-line-plus” approach as there is no cross-collateralization among the participants.

The approach allows for a lift of up to two notches above the lowest rate participants individual obligation. The uplift can’t exceed the weighted average of the participants. If one of the participants has a speculative-grade rating, the rating cannot rise above Ba1.

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Ratings Pension obligation bond State and local finance Natural disasters California Statewide Communities Development Authority California