Near-certain default spurs downgrade of debt linked to fire-ravaged town
With default seen as near certain, Moody's Investors Service downgraded to Caa3 from B1 a pool of California pension obligation bonds of which the largest component is from Paradise, the town decimated by the Camp Fire.
An estimated 80% to 90% of the town of 27,000 was laid to waste in November by the fast-moving northern California blaze.
Moody’s analysts downgraded the California Statewide Communities Development Authority taxable POBs 2007 A-2 capital appreciation bonds Thursday and assigned a stable outlook.
The 2007 Series A-2 bonds are also being serviced by the cities of Palm Springs and Port Hueneme, but Paradise accounts for almost half of the pooled debt in the series, according to a report published by Reason Foundation analyst Marc Joffe in November.
“The downgrade to Caa3 reflects the near complete destruction of the Town of Paradise, the pool's largest participant, by the Camp Fire in November 2018,” Moody’s analysts wrote. “The heavy physical, social, and economic damage to the town will inexorably devastate its financial position, realistically eliminating any short term ability to pay debt service on its share of the bonds, thus rendering a near-term default almost certain.”
The rating action resolves a review for downgrade initiated on November 14. The Caa3 rating applies to $12.3 million par value in outstanding bonds.
The town has scheduled debt service payments of more than $1 million annually through 2029 on capital appreciation pension obligation bonds.
Moody's said it expects the June 1 debt service payment will be made because it was fully funded prior to the fire and is currently held by the bond's trustee, but its analysts anticipate the city will default on the Dec. 1 interest payment.
Bondholders are likely to be made whole, however, because the debt is insured by Ambac, Moody’s said.
The Caa3 rating reflects the weighted average of the credit quality for each of the pool participants. The current shares of outstanding debt service are : Paradise 41.3%, Palm Springs 25.1%, and Port Hueneme 33.6%, Moody's said.
The fire-ravaged city's share declines over time, Moody's said, but remains material through fiscal 2031.
The unlikelihood that the credit quality of the pool participants would change materially in the near term was cited for the stable outlook. More specifically, Moody's said, it will take years for Paradise to rebuild and in the near term the financial challenges mean that default is highly likely over the next several years.
There is no cross-collateralization or default between the cities in the pool. No municipality is responsible for the bond repayments of any other municipality, and a default by one municipality will not constitute default of any other municipality.