Moody’s Downgrades Redevelopment Agency Bonds
In light of the pending elimination of California redevelopment agencies, Moody’s Investors Service has downgraded $11.6 billion of tax allocation bonds. According to Moody’s, all bonds rated above Baa2 will be lowered by one rating degree.
As industry participants struggle to comply with ABx1 26, which calls for the elimination of all redevelopment agencies in California, concerns have been raised regarding the timely payment of debt service for outstanding bonds secured by tax increment. Although Moody’s noted in its release the intent expressed in ABx1 26 to honor existing obligations through creation of successor agencies charged with fulfilling existing bond contracts, the rating agency also noted that much uncertainty exists. Such uncertainty stems from the audit requirements and sheer complexity of the law, as well as the challenges associated with the reallocation of tax increment revenue, which “may initially conflict with existing bond indentures.”
Moody’s also indicated that future downgrades could be possible. For instance, should a judge find that compliance with bond documents is subordinate to other objectives of ABx1 26, or should the legislation be implemented in a way that does not preserve timely debt service payments, redevelopment agency bond ratings could be reduced even further.
