NEW YORK - Moody's Investors Service said it has downgraded to Baa2, from Baa1, the Redevelopment Agency of the city of San Pablo, Calif.'s 1999 Tenth Township project area tax allocation bonds (TABs), and affirmed the Baa2 rating on the agency's 2001 tax allocation revenue bonds, which are secured by two underlying TAB issues, primarily from Tenth Township but also from the agency's Legacy project area.
The downgrade reflects the potential for additional assessed valuation declines in the Tenth Township project area after two years of successive declines aggregating to 26%. The downgrade also reflects the now relatively thin coverage of total debt service, including subordinate lien debt, and the relatively unusual exposure for a redevelopment agency to variable rate debt (albeit swapped to fixed). About 41% of the agency's total debt is in daily VRDOs.
San Pablo's Tenth Township project area is largely residential and grew rapidly during the housing boom. Assessed valuation almost doubled to $1.4 billion from 2001 to 2008.
The project area is now giving up a substantial portion of those gains owing to the housing market decline. Total A.V. declined 4% in FY 2009 and another 23% for FY 2010. Home prices in San Pablo have continued to decline, approximately 16% from October 2008 to October 2009, so additional A.V. reductions would not be unexpected. Some stabilization in the housing market has been seen in recent months, likely limiting future declines to a manageable level.
The Baa2-rated Tenth Township TABs are senior lien, fixed rate bonds. Maximum annual debt service coverage by projected fiscal 2010 revenues remains quite strong at 1.68x despite the recent precipitous reduction in assessed valuation. Near-term coverage levels in 2010 and 2011 are projected to be very healthy at 2.23x and 2.01x.
Senior lien coverage will in fact be stronger than when we initially rated the 2001 TABs, despite a large, subsequent parity debt issuance in 2004. However, coverage of maximum annual debt service on all bonds, including a $36 million subordinate lien, variable rate issue in 2006, will only be a relatively thin 1.19x. Moody's senior lien rating reflects not just the senior lien coverage, but the agency's overall credit strength, which includes its ability to meet all of its debt service obligations.
San Pablo's ability to meet its full debt service obligation depends in part on the continued favorable performance of its variable rate debt. While this is a reasonable expectation--rates on the agency's VRDOs returned to normal very quickly after the worst of the national credit crisis last fall, and rates are currently very low--it is unusual for a redevelopment agency to face the risks associated with variable rate debt. A particular near-term challenge may be the economic replacement of the liquidity facility on these variable rate bonds when it expires in June 2011.
