NEW YORK--(BUSINESS WIRE)--Fitch Ratings has placed the following Pittsburg Redevelopment Agency, California's (the agency) Los Medanos Community Development Project tax allocation bonds (TABs) on Rating Watch Negative:
--$144.2 million subordinate non-housing TABs at 'BB-'.
The subordinate non-housing TABs are secured by all taxes allocated to the agency, a debt service reserve fund, and payments from swap contracts, minus senior debt service payments, the 20% housing set-aside, and the Contra Costa County (the county) administrative fee.
KEY RATING DRIVERS
LAWSUIT A MAJOR RISK: The Rating Watch Negative reflects the agency's expectation that a lawsuit will be filed that, if settled in favor of the plaintiff, Fitch estimates would cause the agency's non-housing subordinate TABs to default by fiscal 2017 in the absence of future assessed value (AV) growth.
SIGNIFICANT HOME PRICE GAINS: Home prices have risen a substantial 20% through January 2013. These gains may translate into a significant AV gain in fiscal 2014 that could mitigate an adverse legal outcome.
OTHER TABS NOT AFFECTED: The agency's housing TABs and senior non-housing TABs are not affected by the lawsuit. Pass-through payments are not deducted from housing TABs' tax increment revenues, and the senior TABs' coverage is sufficiently high to withstand a related revenue loss without a material impact to debt service coverage.
LEGAL LOSS, MODEST AV GROWTH: Fitch likely would downgrade the bonds if the lawsuit were settled in favor of the plaintiff and there were no significant AV growth for fiscal 2014 as a material mitigant.
In early February Pittsburg Unified School District (the district) sought a temporary restraining order against the county to block the county from distributing $1.3 million in tax increment revenues to the agency. The district believes this cash should be distributed to the district as a pass-through payment, despite the payment's subordination status to debt service. The district maintains that its payment is senior to the annual replenishment of certain agency reserves that have become a technical necessity due to state-wide dissolution legislation (i.e. AB 1X 26).
The restraining order was denied. However, the court ordered the county to hold the funds in trust until the dispute with the district is resolved. The district has not yet served the agency, but agency management believes legal action is forthcoming. The agency also believes that the full annual loss of tax increment would equal approximately $3 million if the district's lawsuit succeeds as the outcome would apply not just to the district but to all overlapping taxing entities with subordinated pass-through payments.
Fitch believes this level of tax increment loss would result in a default of the non-housing subordinate TABs by fiscal 2017 under a no-growth AV scenario. The agency has $20.9 million of debt service reserves, and the Fitch-estimated annual draw-down would approximate $4.4 million, inclusive of interest earnings, loan repayments, and adjusted for smoothing of a letter of credit fee that is being temporarily accrued and is payable in fiscal 2015.
Fitch estimates that the TABs'reserves will be partially drawn down through final maturity, but not depleted, under a no-growth scenario wherein the agency wins the lawsuit.
HOUSE PRICES UP SIGNIFICANTLY
Single family home values in Pittsburg are up a substantial 20% in January 2013 compared to the prior year, according to Zillow. It is possible these market gains could result in a material AV gain in fiscal 2014, which is based on home prices on January 1, 2013. Final AV information should be available around August.
A substantial portion of homes in Pittsburg have been re-assessed under Proposition 8, so an upward re-assessment of these homes would not be limited to the typical 2% cap under Proposition 13. A hypothetically substantial AV gain potentially could offset tax increment losses related to the lawsuit if ruled in favor of the district. Fitch estimates the AV gain would need to approximate 8.5% to fully offset the loss of tax increment if the district's lawsuit prevails.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by Zillow.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria