(The following was released by the rating agency) SAN FRANCISCO, June 5 (Fitch) Fitch Ratings has downgraded the following San Jose Redevelopment Agency, CA tax allocation bonds (TABs):
--$235.3 million merged area redevelopment projects TABs, series 2003, 2008A and 2008B, to ‘BB’ from ‘BBB-';
--$1.6 billion merged area redevelopment projects TABS, series 1993, 1997, 1999, 2002, 2004A, 2005A, 2005B, 2006B, 2006A-T, 2006C, 2006D, 2007A-T, 2007B, to ‘BB-’ from ‘BB+'.
All of the merged area TABs are placed on Rating Watch Negative. In addition, Fitch has placed $247.5 million in housing set aside TABs, rated ‘A’, on Rating Watch Negative.
--The merged area TABs are secured by gross tax increment revenue from the project area net of certain senior pass-throughs and the 20% set-aside for housing. The housing TABs are secured by the 20% housing set aside.
--All TABs are also secured by debt service reserve funds; however, only the merged area redevelopment project TABs, series 2003 and 2008A and 2008B benefit from a cash-funded reserve.
KEY RATING DRIVERS POTENTIAL PAYMENT INSUFFICIENCY: The downgrades on the merged area bonds reflect information received from the Successor Agency to the San Jose Redevelopment Agency (RDA) that it currently has insufficient funds on hand to make its Aug. 1, 2012 debt service payments in full. The shortfall results from Santa Clara County’s (the county) interpretation of the state law dissolving RDAs (AB X126).
COUNTY WITHHOLDING FUNDS: According to the RDA, the county contends that an annual ‘pass-through’ payment due to the county which was contractually subordinated to debt service is now in a senior position under AB X126 ($15.7 million). An additional $3.6 million was withheld because the county ceased to include tax revenues from pre-1989 tax over-rides as part of the tax increment pledged to bondholders. A material event notice confirms that approximately $20 million has been withheld by the county from the June 1 payment to the RDA.
STATE GUIDANCE SOUGHT: The city has requested that the State Controller review the county’s actions under the provision in AB1x26 requiring three days before actions become effective. During this time, the controller or State Department of Finance can request that the county reconsider its action.
LITIGATION POSSIBLE: In the absence of a favorable outcome with the state, the city is likely to sue the county, prolonging the uncertainty as to the disposition of funds needed for debt service.
RAPIDLY EVOLVING SITUATION: The Rating Watch Negative is based on the limited information currently available and the high degree of uncertainty about actions to be taken by the city, county, and state to resolve the issue at hand. Fitch plans to continue to gather and review information as it becomes available and to take further action as appropriate.
LACK OF FAVORABLE RESOLUTION FOR BONDHOLDERS: Fitch believes there are a number of ways in which a near-term resolution could insure full and timely debt service payment on Aug. 1. However, if such resolution is not forthcoming the ratings could change substantially.
For more information, please see ‘Fitch Takes Various Rating Actions on San Jose Redevelopment Agency TABS’, dated April 20, 2012.