Fitch Rates $162MM California State Building Authorities Bonds 'A'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned an 'A' rating to the following lease revenue refunding bonds:

--$102.75 million San Francisco State Building Authority lease revenue refunding bonds (State of California San Francisco Civic Center Complex) 2015 series A;

--$58.875 million Oakland State Building Authority lease revenue refunding bonds (Elihu M. Harris State Office Building) 2015 series A.

The bonds will be sold via negotiated sale on Nov. 17, 2015.

The Rating Outlook is Stable.

SECURITY

Special obligations of each authority secured by a pledge of base rental payments by the California Department of General Services (DGS) received by each authority and pledged to the trustee. The bonds are separately secured under separate indentures.

KEY RATING DRIVERS

RATING LINKED TO STATE: The 'A' rating on lease revenue bonds, one notch below the State of California's general obligation (GO) rating, reflects the appropriation required for debt service payment.

CALIFORNIA'S GENERAL CREDIT QUALITY: The rating incorporates the size and breadth of the state's economy and tax base, a moderate debt load, and the institutional improvements made by the state in recent years that have contributed to improved financial performance.

RATING SENSITIVITIES

RATING LINKED TO STATE CREDIT QUALITY: The ratings are sensitive to changes in the state's GO bond rating, to which these ratings are linked.

CREDIT PROFILE

Most of California's lease revenue bonds are issued through a state entity, the State Public Works Board, although the state has periodically relied on joint powers agencies--such as the San Francisco (SFSBA) and Oakland State Building Authorities (OSBA)--to finance state facilities.

SFBSA's lease revenue bonds were initially issued in 1996 to finance renovation of an existing historic office building and construction of a new office building and parking facilities in the civic center area of San Francisco. OSBA's lease revenue bonds were initially issued in 1998 to finance construction of an office building and parking facilities in downtown Oakland. Each of the current offerings refund outstanding bonds for debt service savings.

Although issued by joint powers agencies linked to San Francisco and Oakland, the credit quality of the bonds is tied to the payment of lease rentals by the state itself. DGS, a state agency which manages state facilities, covenants to seek an annual appropriation by the legislature for base rentals for debt service, and additional rentals for administrative, insurance and operating costs.

The base rentals are pledged to bondholders and are sized at levels sufficient to cover debt service. The two state building authorities have assigned their rights to the base rentals to the trustee. Payments by DGS of base and additional rentals are made 15 days in advance of the debt service payment date.

The DGS covenant to seek an appropriation is subject to the beneficial use and occupancy of the facility. As is the case with California's appropriation bonds, abatement is possible, but the lease requires rental interruption insurance sufficient to cover base rentals for three years. The state may exercise an option to purchase the building for the remaining amount of the bonds outstanding, or a nominal cost upon final maturity.

LINK TO STATE GO RATING

Appropriation bond ratings are linked to the state's GO bond rating, at 'A+', Rating Outlook Stable. The rating reflects the institutional improvements made by the state in recent years, its disciplined approach to achieving and maintaining structural balance in recent budgets, and the consequent fiscal progress made to date by the state as it recovers from the severe budgetary and cash flow crisis of 2008-2009. Fitch believes that these gains provide the state with a greater capacity to address future fiscal and budgetary cyclicality.

These fiscal management improvements remain untested by a severe recessionary event, but in Fitch's view the state is in a materially improved position to address future economic and revenue downturns, and the state's finances are likely to further strengthen assuming the current expansion and budgetary discipline continue. However, California's credit standing is likely to remain lower than that of most states given its still relatively lower flexibility related to revenue limitations, the initiative process, spending formulas for education, and other factors that remain unchanged. Key credit strengths include the state's massive, diverse economy and tax base.

For further information on California's GO rating, please see Fitch's rating action commentary from Oct. 5, 2015, 'Fitch Rates California's $960MM GOs 'A+'; Outlook Stable', available at www.fitchratings.com.

Date of Relevant Rating Committee: Aug. 18, 2015.

Additional information is available at 'www.fitchratings.com'.

Fitch recently published an exposure draft of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015). The draft includes a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to fewer than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published by Jan. 20, 2016. Once approved, the criteria will be applied immediately to any new issue and surveillance rating review. Fitch anticipates the criteria to be applied to all ratings that fall under the criteria within a 12-month period from the final approval date.

Applicable Criteria

Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869942

Tax-Supported Rating Criteria (pub. 14 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. State Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686033

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=993430

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Karen Krop
Senior Director
+1-212-908-0661
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Douglas Offerman
Senior Director
+1-212-908-0889
or
Committee Chairperson
Laura Porter
Managing Director
+1-212-908-0575
or
Media Relations:
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Karen Krop
Senior Director
+1-212-908-0661
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Douglas Offerman
Senior Director
+1-212-908-0889
or
Committee Chairperson
Laura Porter
Managing Director
+1-212-908-0575
or
Media Relations:
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com