Moody's Investors Service said it has downgraded to Ba2 from Ba1 the rating of the successor agency to the Atwater Redevelopment Agency, Calif.'s Series 2007A and B bonds and assigned a negative outlook.

The rating action affects approximately $9.3 million of outstanding debt.

The downgrade is driven by projections that show that as a result of changes to California law that dissolved redevelopment agencies (RDAs) and changed the method by which the successors agencies to the RDAs receive incremental tax revenues to pay debt service on tax allocation bonds, debt service coverage will be insufficient in alternating semi-annual periods beginning in the first-half of 2014-assuming no growth in or declining assessed values (AV) to the project area.

Moody's does not expect a default on the bonds in the short- to medium- term given the reserve fund surety provided by Radian (Ba1 negative) and its expectation that the successor agency, Merced County auditor and California's Department of Finance will work out an arrangement to set aside sufficient funds from the second half of the year to cover any debt service shortfalls in the first half of every year beginning in 2014.

These factors do not completely offset the low coverage and uncertainty of how the provisions of the statutes will be implemented. Moody's views these as significant credit weaknesses and underpinning the negative outlook.

Other factors affecting the rating include a project area with a small AV; the city's location in the midst of California's agricultural Central Valley, which was among the hardest hit areas for property value and AV declines; socio-economic indicators that are higher than might be expected; the depth of incremental AV which provides protection against economic and real estate downturns; and a top taxpayer profile which, while concentrated, is not unusually so for a redevelopment project area.

On an annual basis, debt service coverage levels are lean and expected to remain so.

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