2008-10-17 03:38:00 -
- Fitch Ratings assigns a long-term rating of 'AA' to bank bonds corresponding to San Diego County, California taxable pension obligation bonds (POBs) series 2008B-1 and 2008B-2. In addition, Fitch confirms the following outstanding ratings for the county:
--Implied general obligation (GO) bond rating at 'AA+';
--Parity POBs at 'AA';
--San Diego County certificates of obligation (COPs)
at 'AA'; and
--San Diego Regional Building Authority COPs at 'AA'.
The Rating Outlook is Stable.
Based on a review of the interest rate provisions, cure period, and amortization schedule specified in the documents governing the bank bonds, Fitch believes that the incremental risk associated with the bank bonds does not have a material impact on San Diego County's long-term credit rating. To date, $30 million of the county's $100 million outstanding variable rate POBs have been tendered and another smaller amount may become bank-held shortly. Fitch's opinion is based on the small share of county debt outstanding represented by variable rate debt, the county's financial flexibility as demonstrated in early debt repayment in several recent years, and the cushion included in the assumed interest rate for these bonds in the county's fiscal 2009 budget.
The bank-held bonds bear interest at 6.5% currently, calculated at the base rate (the higher of the federal funds rate plus 3% or prime plus 2%), and retain this rate for the first 30 days. For the next 60 day period, which commences Nov. 10, the rate rises to the base rate plus 1%. If the bonds remain bank-held for 90 days, the rate increases to the base rate plus 2%, and after 120 days, the greater of base rate plus 3% or 11%. Under the standby bond purchase agreement provided by Landesbank Baden-Wurttemberg, the county must repay all bank bonds within three years of the purchase date, with all repayments made on the subsequent Jan. 1 or July 1.
The county budgeted interest for these bonds at 7.13%, reflecting the prior structure as auction rate securities that were refunded by the 2008 POBs subsequent to budget adoption. Consequently, the current interest rate and likely the next 30 days' rate fit within the existing budget allocation. Also, at only 6% of the county's total outstanding tax-supported debt, the interest rate on these $100 million in bonds can rise without impairing credit quality.
While the term-out provision is somewhat strict, Fitch's concern is offset by the county's strong history of using operating funds to reduce outstanding debt and pension obligations, providing the ability to redeem at least some of the bank bonds with cash if market options are blocked. The county currently is considering various options for these bonds and expects to take action well before bank repayments come due.
Fitch issued an exposure draft on July 31, 2008 proposing a recalibration of tax-supported and water/sewer revenue bond ratings which, if adopted, may result in an upward revision of this rating (see Fitch research 'Exposure Draft: Reassessment of the Municipal Ratings Framework'). At this time, Fitch is deferring its final determination on municipal recalibration. Fitch will continue to monitor market and credit conditions, and plans to revisit the recalibration in the first quarter of 2009.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
Fitch Ratings
Amy S. Doppelt, +1-415-732-5612 (San Francisco)
Alan Gibson, +1-415-732-7577 (San Francisco)
Media Relations:
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