Fitch Ratings has placed $1.7 billion of San Jose Redevelopment Agency tax allocation bonds on rating watch negative.

Fitch analysts said the negative watch on the BBB-minus-rated bonds reflects the risk to the redevelopment agency’s senior debt if a letter of credit from JPMorgan Chase & Co., securing $95 million of subordinate variable-rate bonds, expires.

The expiration of the LOC on Nov. 25 would trigger a default on the subordinate debt and the bank will have to buy the bonds.

The bank in turn would accelerate repayment of the unrated subordinate debt.

Fitch also affirmed its A rating on $350 million of housing tax allocation bonds, saying the debt service is sound and the potential default would not affect the repayment of the housing tax-allocation bonds.

Two bills passed by the Legislature in June as part of the budget call for the elimination of all redevelopment agencies in California unless those agencies hand over large payments to the state. Most aspects of redevelopment are frozen until a current legal challenge to the bills concludes.

Gov. Jerry Brown vetoed legislation earlier this month that would have allowed RDAs to extend expiring credit lines.

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.

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