Moody’s affirms California and its negative outlook ahead of Public Works Board deal
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Moody’s Investors Service retained its negative outlook on California as the state plans to sell $371 million of Public Works Board lease revenue bonds competitively on Oct. 25.
The rating agency when it delayed the income tax filing deadline for almost every California county to October from April, citing disaster declarations.
Moody’s affirmed an Aa3 rating on existing SPWB debt, the rating is one notch lower than the state’s issuer rating to “incorporate the more essential nature of the state facilities financed with the debt, a moderate legal framework consisting of a continuing appropriation of lease payments, but risk of abatement if financed property is unavailable to the state, and the large inventory of property owned by the state from which a facility could be substituted into a lease in the event the base rental on the currently financed facility under the lease is abated.”
The rating agency had affirmed the Aa2 rating on the state’s general obligation bonds in May, citing the state’s massive economic base and healthy budget reserves and liquidity. The Aa2 rating on the state’s GO bonds is the same as the issuer rating due to the broad pledge on the bonds, despite a constitutional priority of funding education, Moody’s said.
The rating on the SPWB’s lease debt could be upgraded if the State of California’s issuer rating is upgraded, or downgraded if the state’s issuer rating falls. SPWB debt could also be downgraded if the legal framework supporting the payment of lease debt weakens, Moody’s said.
The lease revenue bonds are secured by a pledge of base rental payments to be made by participating state departments pursuant to their own individual lease agreements with the SPWB.
The SPWB is issuing the bonds under a stand-alone indenture. The bonds will not be secured by a debt service reserve.
“California is the largest state in the US based on its population of almost 40 million. The state’s estimated gross domestic product is $3.6 trillion,” Moody’s said. “This accounts for about 14% of US economic output and is larger than that of all but four other nations.”
The State Public Works Board, formed in 1946, is empowered to acquire, construct, improve, and operate public buildings and related facilities for state agencies. Since 1985, the SPWB has been active in the construction of facilities for purposes including higher education and corrections.
