LOS ANGELES -- The average rating of California tax allocation bonds from Moody’s Investors Service is now Ba1, after the agency completed a nine-month review of such ratings.

The ratings review resulted in 42 affirmations, 12 upgrades, nine downgrades, and 31 ratings withdrawals for insufficient information, Moody’s said in a report Tuesday.

The reviews of California TABs were prompted by state legislation dissolving the redevelopment agencies and changing the fundamental flow of tax increment funds to repay debt.

After the state enacted this legislation, which became effective in February 2012, the agency placed every California TAB rating under review and downgraded to Ba1 all of the bonds that were rated Baa3 or higher.

Moody’s reviewed the entire TAB portfolio again in 2013 after completing the collection of supplemental data and a determination of new rating criteria to address the risks created by the redevelopment dissolution legislation. The review began in February and concluded in September.

“The primary driver of upgrades was a strong increment-to-total [assessed valuation] ratio combined with at least two times debt service coverage in both semi-annual periods, after the payment of all pass-through payments,” Moody’s analysts wrote in the report.

The downgrades were primarily driven by continued tax base stress combined with relative weaknesses in cash-flows and legal security, Moody’s said.

Among the downgrades were the successor agencies to Atwater Redevelopment Agency, Azusa Redevelopment Agency, the Soledad Redevelopment Agency, and the Torrance Redevelopment Agency.

The average rating of the successor agencies is now Ba1, with only 12 of the 63 ratings an investment-grade Baa3 or higher.

“The new rating criteria primarily grew out of the dissolution law’s creation of a new, relatively weak tax increment distribution process that was superimposed on existing practices and redevelopment agencies’ legal covenants,” Moody’s said. “The new criteria also reflected the now fundamentally weaker institutional backing for TABs by small “successor agencies” rather than fully staffed redevelopment agencies.”

The new criteria also reflect the unknowns of implementing and interpreting the dissolution law and its related “clean-up” legislation. Analysts said they will continue to review criteria and ratings as these unknowns are addressed.

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