MENLO PARK, Calif. — California veterans general obligation bonds Thursday landed a ratings upgrade to Aa2 from Moody’s Investors Service, affecting $1.17 billion of outstanding debt.
The Cal-Vet GO bonds won the two-notch upgrade from A1 largely due to a new law that safeguards debt-service payments, the rating agency said.
“Bondholders are now better protected from competing claims for state general fund expenditures, such as public school support, which takes priority over general obligation debt service,” analyst Omar Quzidane said in a rating report on the upgrade.
Moody’s assigned a stable outlook at the higher rating.
Fitch Ratings has a AA-minus rating with a negative outlook on the debt while Standard & Poor’s has a AA rating with a stable outlook.
In June, the state Legislature passed a measure to strengthen California’s veterans home-loan GO bond program. The legislation created the Veterans Bond Payment Fund. Previously, program funds had been comingled with the state’s general fund.
California GOs carry ratings of A1 from Moody’s and A-minus from Fitch and from Standard & Poor’s.
The Cal-Vet bond program is self-supporting, but debt-service payments had been made from the general fund, which was then reimbursed with funds from the veterans’ bond program, specifically the Veterans’ Farm and Home Building Fund of 1943.
That meant the state’s rating became a drag on the Cal-Vet GO rating, even though the veterans’ bond fund could command higher ratings and lower interest rates on its own, according to a legislative staff analysis of the bill.
Despite the bond program’s financial condition declining over the past few years with expenses exceeding revenue, Moody’s analysts said it has managed to maintain an asset-to-debt ratio that is high enough to absorb potential loan losses.
However, Moody’s noted the Cal-Vets program still faces challenges from the state’s weak housing market and its sluggish economy.
The program has been “unable to regain profitability after several years of operating losses,” the report said.