SAN FRANCISCO — Moody’s Investors Service said the San Jose Redevelopment Agency’s $1.7 billion of outstanding senior bonds could suffer should the RDA be forced to default on a floating-rate bond issue.
The Redevelopment Agency is facing the expiration of a letter of credit securing $95 million of subordinate variable-rate bonds after Gov. Jerry Brown vetoed legislation that would have allowed the credit line to be continued.
If the LOC expires, a default on the subordinate debt will be triggered and the bank will have to buy the bonds. The bank in turn would accelerate repayment of the subordinate debt by the Redevelopment Agency.
Moody’s said that if that happens it would be a “credit negative” for the agency’s senior bonds because diverting money to make the accelerated payment on the subordinate debt would reduce “the agency’s general financial flexibility.”
The senior bonds are rated either Baa1 and Baa2 by Moody’s and are on review for a possible downgrade after being downgraded earlier this year. Moody’s does not rate the variable-rate bonds.
“The accelerated obligation would be challenging for the issuer to meet,” Moody’s analyst Kevork Khrimian said in a special report Tuesday. “Failure to resolve this matter could put downward pressure on those ratings.”
Khrimian said the downgrade review is a result of the uncertainties surrounding a redevelopment agency law that has hindered San Jose.
Bills passed by the Legislature in June as part of the budget call for the elimination of all California RDAs unless they hand over large payments to the state government.
JPMorgan has said Brown’s veto leaves it without clear legal authority to extend the letter of credit past the Nov. 25 deadline.
The city said the bank could “unilaterally” extend the credit line without the legislation and said it is trying to find a solution agreeable to both sides.
Moody’s said the default is avoidable and it’s possible an accommodation could be reached.
The vetoed “cleanup” bill targeted several aspects of the redevelopment legislation, which abolishes the agencies unless they agree to make payments to the state to help close this year’s budget deficit.
The measure, which included several other provisions, would have authorized RDAs to extend expiring LOCs. Brown vetoed it Monday.
In a veto message, Brown said it would be premature to change the redevelopment legislation until the state Supreme Court rules on a lawsuit challenging it.
A decision by the court is expected before Jan. 15. In the meantime, RDAs are effectively shut down and barred from engaging in any new financing agreements.
Moody’s said a number of redevelopment agencies in California are facing expiring letters of credit that back bonds, but San Jose is largest facing an imminent deadline.
A similar situation exists with the Rocklin Redevelopment Agency, which faces the loss of a $3.4 million letter of credit.
The California treasurer’s office said it has been working with San Jose and Rocklin on finding another solution outside of the vetoed legislation.
The city of San Jose is expecting up to a $115 million general fund deficit in the next fiscal year after closing a similar-sized hole this year with steep cuts.
It already is forking over millions of dollars from the general fund to pay the Redevelopment Agency’s debt service and is on the hook for tens of millions of dollars in loans to the RDA.
Standard & Poor’s downgraded San Jose’s RDA senior debt to BBB-plus and Fitch Ratings cut its rating to BBB-minus, both earlier this year and mainly due to declining tax revenue related to falling property prices.