LOS ANGELES — Montebello, Calif., had its issuer rating upgraded Tuesday to Baa1 by Moody’s Investors Service, which left the city’s lease-backed bonds rated junk.
Moody’s upgraded the city’s issuer rating to Baa1 from Baa2, but affirmed the city’s Ba1 lease-backed rating.
The city of 65,000 underwent eight financial audits in 2011 following investigations by the Los Angeles County district attorney’s office and the federal government into concerns over financial mismanagement.
The investigations resulted in no charges of corruption; and efforts by a team of financial advisors hired by the city during that time helped the city rectify its issues and return to a sound fiscal track.
The issuer rating upgrade, which doesn’t apply to any actual bonds, reflects the strength and resiliency of the tax base, according to the Moody’s report.
The three-notch distinction between the city’s Ba1 lease-backed bond rating and its Baa1 issuer rating represents the less secure pledge for lease payments and the additional risk to bondholders from the city’s financial operational and economic condition over the more secure general obligation bond pledge.
Under California law, a city’s GO pledge is an unlimited ad valorem pledge of the city’s tax base, analysts said. The notching between the issuer rating and the lease rating could widen if the city’s general fund financial position deteriorates and thus further limits the already narrow lease pledge.
Moody’s analysts said the assessed valuation of Montebello’s property tax base has proven quite stable and is now on an upward track. Assessed valuation growth in the past two fiscal years has more than compensated for the slight declines that occurred in the prior two years, according to the report.
The city’s improved financial position also contributed to the upgrade and supports the affirmation of the city’s lease supported rating, which impacts $13.3 million in outstanding lease-secured obligations issued in 2000.
The speculative rating on its lease-backed bonds comes because the city continues to face key challenges in the near term, including the city’s oversized enterprise exposure due to a city-owned golf course and hotel, Moody’s analysts said.
Both enterprises have outstanding variable rate debt and their related letters of credit are due to expire this year.
The golf course debt is likely to be refunded with fixed-rate lease obligations in the near term, but the solution for the hotel-related debt remains uncertain, according to the report.
While the expiration of the LOC would not result in acceleration of the principal, the city could face escalating debt service due to higher interest rates. The city’s debt position is otherwise manageable with a slightly above average lease burden, Moody’s said.