Methodology shift may bring upgrades to California redevelopment bonds

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LOS ANGELES — About $1 billion in California redevelopment agency debt is under review for possible upgrade after Moody’s Investors Service changed its rating methodology.

Moody’s placed 38 tax increment debt bond ratings under review for upgrade Feb. 7 when it published the update to its tax increment debt methodology.

California approved a law in 2011 that dissolved more than 400 redevelopment agencies. The law sparked a process of unwinding the redevelopment agencies and transferring obligations, including bonds, to new “successor agencies” under a complex oversight process.

The review, expected to be completed within 60 days, could mean upgrades of one or two notches for the majority and as high as three notches for a small number of credits, said Lori Trevino, a Moody’s analyst.

“We downgraded these at dissolution, because of the unprecedented situation that affected all of the redevelopment agencies,” Trevino said.

The successor agencies — in most cases, the municipalities that created the RDAs — have had to tally their debts and assets, get them approved first by a county-level committee and then by the state, so they could make the required payments to the state and debt service.

In June 2012, Moody’s lowered the ratings on $11.6 billion in RDA credits it rated Baa3 or higher to Ba1, and put the ratings on watch for possible withdrawal. It also instituted more stringent requirements for California tax increment debt including higher debt service coverage levels.

The ratings have experienced previous upgrades as the state smoothed out the process.

Through this methodology update, Trevino said Moody’s recognizes the lessened operational risks after several years of successful implementation of the dissolution process.

The state’s semi-annual funding distribution process raised cash flow concerns for bonds that has been rectified by adoption of an annual dispersal system that comes through a new law that went into effect last year, Trevino said.

The revisions bring a unified approach to rating tax increment debt and the elimination of a separate approach and scorecard for California issuers, according to the Feb. 7 report.

“We also changed the threshold for coverage,” said Eric Hoffmann, a Moody’s senior vice president and manager. “California had higher coverage levels to reflect the same risk as other states.”

That means where an issuer may have been required to have two times debt coverage, the coverage might be lowered to 1.5 times, which naturally results in a higher rating, Trevino said.

The review affects debt issued by 14 successor agencies to the former redevelopment agencies of Alameda County, Bakersfield, Buena Park, Huntington Beach, Indian Wells, Los Angeles, Oakland, Rancho Mirage, Riverside County, San Diego, San Francisco, Santa Barbara, Santa Monica and Sunnyvale.

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Ratings Tax increment financing district San Jose Redevelopment Agency Successor Anaheim Redevelopment Agency Successor California