The Securities and Exchange Commission is pursuing fraud charges against Victorville, Calif.'s Southern California Logistics Authority in connection with a 2008 bond offering.

LOS ANGELES — A Victorville, Calif. airport authority facing U.S. Securities and Exchange Commission fraud charges could be looking at another downgrade of its already junk-rated bonds.

The Southern California Logistics Airport Authority's $51 million in subordinate tax allocation revenue bonds Series 2007 and 2008A are on review for downgrade after the authority filed a disclosure notice last week on the Municipal Securities Rulemaking Board's EMMA website saying it might default on its bonds for the eighth time, according to a June 5 Moody's Investors Service report.

The bonds are rated B3.

The authority is embroiled in a court case in which the U.S. Securities and Exchange Commission has alleged fraud charges in connection with a 2008 bond offering.

U.S. District Court Judge John Kronstadt in Los Angeles is expected to hear arguments Aug. 3 on a summary judgment motion in the case that is scheduled for a jury trial October 27 if an agreement isn't reached.

The bonds are secured solely by allocated incremental revenues from all twelve sub-areas of Victor Valley Economic Development Authority's project area, net of housing set-asides, debt service on senior lien bonds, and other senior pass-throughs.

The placement of the B3 on review for possible downgrade reflects uncertainty over whether prior debt service defaults on the 2007 and 2008A subordinate tax allocation bonds will be permitted to be cured with subsequent, excess tax increment revenues, according to Moody's.

"This uncertainty arises from the issuer's June 1st disclosure statement and June 4 teleconference indicating that the state's Department of Finance is disallowing the use of excess tax increment revenues for the payment of previously defaulted debt service," according to Moody's analysts. The disallowance is a deviation from past practices by the finance department, Moody's said.

The 2007 and 2008A subordinate bonds will likely continue to default in the next few years, according to Moody's.

"This action by DOF raises questions about whether tax increment revenues in the future, when sufficient to pay debt service on these bonds, can be used to cure these defaults," Moody's analysts said. "As a result, we are reevaluating our projected bondholder recovery rate."

The B3 rating reflects an expected recovery of 95%-97%.

The review will focus on whether likely recovery rates in light of this recent DOF action are still consistent with the B3 rating, Moody's analysts said in the report.

"We will also consider whether this disallowance constitutes a violation of bondholders' legal security and thereby gives rise to a potential legal action," Moody's analysts wrote.

H.D. Palmer, a DOF spokesman, said that making bond payments is, and always has been, a priority in the wake of the dissolution of the state's redevelopment agencies.

California dissolved all redevelopment agencies in 2012. The successor agencies to these redevelopment agencies are subject to a semiannual, state approval process to use their tax increment revenues for preexisting obligations.

Palmer also said the airport authority's bonds are not redevelopment agency bonds. Palmer pointed to a bond document posted on EMMA that states the SCLAA's "bonds are not a debt of the Victor Valley Economic Development Authority," the city's former redevelopment agency.

The state has provided the city with money to make bond payments on its redevelopment debt, Palmer said.

The SCLAA bonds and payment is very complicated, Palmer said.

"But, as to DOF's role, DOF has approved certain amounts owed to the City of Victorville which the City is required to pay to SCLAA for part of the payment of SCLAA's debt service," Palmer said. "In some instances, the city has requested additional amounts, however, DOF determined the "excess" was not approvable."

Moody's maintains a Ba1 rating on SCLAA's housing bonds Series 2007. The Ba1 housing-set aside bonds are not impacted by this rating action as they are not in default and have satisfactory debt service coverage for the rating at 1.39 times coverage for  fiscal year 2015, per the Continuing Disclosure Report dated February 2015.


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