SAN FRANCISCO — Moody's Investors Service downgraded $1.7 billion of San Jose Redevelopment Agency tax allocation bonds after falling property values cut into debt service coverage.
Moody's downgraded several series of the Redevelopment Agency's non-housing tax allocation bonds to either Baa1 or Baa2 from A2, depending on their debt-service reserve provisions.
It also downgraded the SJRA's housing set-aside bonds one notch, to A2 from A1. The rating agency set its outlook on all of the bonds at negative.
"The downgrades of the non-housing bonds primarily reflect the significant deterioration of debt-service coverage levels brought about by contraction of the assessed valuation" in the agency's project area, Moody's analyst Kevork Khrimian said in a note released Monday.
The non-housing bonds includes series sold from 1993 to 2008. The lower rating for some of the non-housing bonds reflects surety policies to meet debt-service reserve requirements from providers rated below Baa3, including Ambac Assurance Corp.
In California, a redevelopment agency is required to use 20% of its revenue for affordable housing development. The remaining 80% is normally used for economic development. This usually creates two different revenue streams backing bonds: housing and non-housing.
San Jose's redevelopment housing bonds are secured by the 20% of revenue, sending debt-service coverage ratios to 1.86 times for the senior liens.
That compares to much lower coverage ratios for the non-housing paper.
Khrimian said the decline in property values could reduce senior-lien coverage on the non-housing bonds to just 1.04 times and combined first- and second-lien coverage to just 1.0 times.
"These extremely narrow debt service coverage levels provide notably weaker bond holder security than our prior expectations," Khrimian said.
Subordinate non-housing tax allocation bonds include $94 million of second-lien bonds, and the Redevelopment Agency also supports $200 million of city financing for its convention center and a parking garage.
Moody's said low debt service coverage levels may lead the SJRA to ask the city to meet debt service requirements for the convention center and the parking garage.
Assessed values in the redevelopment project area declined 7.6%, or $1.52 billion, in fiscal 2011, falling from a total value of $20 billion in 2010, according to the note.
Khrimian said $1.79 billion in Proposition 8 reductions was the main driver of the decrease.
The proposition requires a county assessor to reassess a property down to market value if that market value falls below its assessed value.
Moody's said a high concentration of incremental assessed value in the top 10 taxpayers in the area, particularly the largest taxpayer, Cisco Systems Inc., also weighs on the ratings. Cisco's contribution made up 16% of the incremental assessed value, while the top 10 payers together made up 36%.
Khrimian said that the agency still benefits from its enormous size — more than 8,000 acres — and the strength of the Silicon Valley economy. The analyst said over the long term, the tech hub will add to demand for property with the SJRA's boundaries.
Earlier in the year, Fitch Ratings downgraded $1.7 billion of the Redevelopment Agency's tax allocation bonds to BBB-minus from A, and dropped its housing set-aside tax allocation bonds to A from A-plus.
Moody's report makes no reference to Gov. Jerry Brown's proposal to eliminate redevelopment agencies. The fate of Brown's RDA proposal is unclear, though he says all outstanding redevelopment debt would be honored.
San Jose Redevelopment Agency non-housing bonds sold in 2006 with a maturity of 2035, which initially sold for $98 with a 4.5% interest rate, last traded on Monday morning at a price of $68 with a yield of 7.24%.