Bangkok--17 Oct--Standard & Poor's
Standard & Poor's Ratings Services assigned its 'A+' rating to California's $450 million in economic recovery refunding bonds, series 2011. At the same time, we affirmed our 'A+' long-term ratings and underlying ratings (SPURs) on the state's $6.51 billion of economic recovery bonds (ERBs). The outlook is stable.
Standard & Poor's simultaneously affirmed the 'AAA/A-1' ratings on the state's series 2004C-1, 2004C-2, 2004C-3, and 2004C-5 bonds and the 'AAA/A-1+' rating the state's 2004C-4 and 2004C-11 bonds.
The rating reflects our view of the state's:
- Very large and diverse tax base;
- Pledge of dedicated $0.0025 special sales tax revenues (SSTRs) that is unaffected by the state's fiscal 2012 budget provision to redirect a portion of state sales taxes to help finance a realignment initiative whereby the delivery of certain services is transferred to local governments from the state;
- Adequate debt service coverage ratios (DSCRs) from pledged revenues, capable of withstanding a variety of stress scenarios;
- Restriction against the sale of additional parity ERBs, except for refunding bonds, even if voters authorize other deficit-financing bonds; and
- Covenant to maintain the senior coverage account (the debt service reserve fund) at a balance equal to 25% of annual debt service.
In addition, the ratings reflect our view of the closed flow of funds structure and a prohibition against inter-fund borrowing of pledged funds with the state general fund although pledged funds are co-mingled with other state funds for investment purposes.
The ratings on the ERBs, which are secured by both the state's general obligation and dedicated statewide quarter-cent sales tax revenues, reflect our view that the credit quality of the ERBs is stronger than that of the state's general obligation bonds (A-/Stable).
"We believe the pledged revenues will likely provide adequate-to-good debt service coverage ratios that would likely be sufficient even in the event of a material decline in SSTRs," said Standard & Poor's credit analyst Gabriel Petek. "Although we recognize that outright recessionary pressures could re-emerge, giving rise to the possibility of additional large SSTR declines, we believe the structure of the ERB program is generally consistent with our expectations for the rating level. However, even if economic conditions were to deteriorate to that extent, the bonds benefit from the presence of a debt service reserve, which equals 25% of annual debt service," added Mr. Petek.
All of California's 2004 series C ERBs hold 'AAA' long-term ratings based jointly (assuming low correlation between the obligor and the letter of credit provider) on the rating of the obligor, California, and the respective letter of credit provider, Bank of America N.A. (C-1, C-2, C-3, and C-5), JPMorgan Chase Bank N.A. (C-4), or BNP Paribas (C-11).
The short-term component of the ratings is based solely on the short-term rating of the banks providing the letters of credit:
- Bank of America N.A. ('A-1' for the series C-1, C-2, C-3, and C-5 bonds);
- JPMorgan Chase Bank N.A. ('A-1+' for the series C-4 bonds); and
- BNP Paribas ('A-1+' for the series C-11 bonds).
RELATED CRITERIA AND RESEARCH
- USPF Criteria: State Ratings Methodology, Jan. 3, 2011
- USPF Criteria: Special Tax Bonds, June 13, 2007
- USPF Criteria: Municipal Applications For Joint Support Criteria, June 25, 2007
Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
Media Contact:
Ola Fadahunsi, New York (1) 212-438-5095,
[email protected]
Analyst Contacts:
Gabriel Petek, San Francisco (1) 415-371-5042
David G Hitchcock, New York (1) 212-438-2022