Moody's Investors Service said it has upgraded the city and county of San Francisco's general obligation bond rating to Aa1 from Aa2.

Moody's said it also upgraded the city's real property lease-backed obligation ratings to Aa3, if previously rated A1, or confirmed the existing Aa3 rating.

Approximately $2.2 billion in debt affected.

The Aa3 rating reflects the city's upgraded benchmark GO rating and the modest credit differences between the city's various real property leases.

These differences were principally whether the lease financing had been voter approved and/or whether specific city revenues had been designated, though not pledged, for the lease payments.

The rating on the city's equipment leases has been confirmed at A1. The outlook for all of these ratings is stable.

Moody's had placed the city's GO and lease-backed obligation ratings on review on October 9, 2012, as part of its review of 32 California cities' ratings. This rating action concludes that review of San Francisco's ratings.

The rating action recognizes the quality of the city's tax base and economy, which have exhibited notable strengths through the recession and are solidly accelerating from the downturn.

These strengths include an exceptionally large tax base, wealthy populace, recovering housing market that had declined only modestly, large and diverse regional economy, and sound prospects for continued economic improvement at a rate superior to the likely state and national growth rates.

The ratings also reflect the city's fiscal position, which includes general fund reserve and cash levels that are somewhat weaker than typical for the rating level but likely to improve through 2014. The city's moderate debt levels are also factored into the rating assignments.

The upgrade also incorporates the agency's changed view of the likelihood of default on a California local government's GO bond relative to obligations secured by its general resources. This new view has generally resulted in a widening of Moody's rating distinction between GO ratings and lease-backed obligation ratings.

In San Francisco's case, lease-backed obligations that were only one notch below the GO rating are now two notches below. Debt service on the city's GO bonds is secured by an unlimited property tax pledge on an exceptionally large tax base.

The city's various lease-backed obligations are primarily supported by the city's general fund, though a variety of other non-pledged and in some cases pledged revenues are also available for debt service. Nonetheless, the exposure of the leases and COPs to the materially more narrow general fund than the unlimited property tax security for the GOs results in current two- and three-notch spread from the GO rating.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.