NEW YORK--(BUSINESS WIRE)--This is an update of a release published Nov. 12, 2015. It clarifies the long-term rating for Sumitomo Mitsui Banking Corporation following today's upgrade of the rating to 'A' from 'A-'. The bank's short-term was unchanged and affirmed at 'F1'.
On the effective date of Nov. 18, 2015, Fitch Ratings will take the following rating actions on the State of California variable rate general obligation (Kindergarten-University Public Education Facilities Bonds) Series 2005A2-1, 2005A3, 2005B1 and 2005B3.
Series 2005A2-1 and Series 2005B3 bonds
--Long-term rating upgraded to 'AA' from 'A';
--Short-term ratings affirmed at 'F1';
Series 2005A3 and Series 2005B1
--Long and short-term affirmed at 'A+/F1'.
The Rating Outlook is Stable for the long-term rating.
The rating action is in connection with: (i) the substitution of the irrevocable direct-pay letters of credit (LOCs) previously provided by Barclays Bank, PLC (rated 'A/F1'/ Stable Outlook, for the Series 2005A2-1 and 2005B3) with substitute LOCs issued by Sumitomo Mitsui Banking Corporation (rated 'A/F1'/Stable Outlook)and (ii) the substitution of the LOCs previously provided by Bank of America, N.A. (rated 'A+/F1'/Stable Outlook, for the Series 2005A3 and 2005B1) with substitute LOCs issued by Mizuho Bank, Ltd. (rated 'A-/F1'/ Stable Outlook). The bonds will be subject to mandatory tender on Nov. 18, 2015.
KEY RATING DRIVERS
The long-term rating for the Series 2005A2-1 and Series 2005B3 will now be determined using Fitch's dual-party pay criteria and will be based jointly on the underlying rating assigned to those bonds by Fitch (currently rated 'A+'), and the rating assigned by Fitch to the Sumitomo Mitsui Banking Corporation (rated 'A/F1'/Stable Outlook), which will provide the substitute LOC as support for the bonds. The short-term 'F1' rating will be based solely on the substitute LOCs.
Fitch's dual-party pay criteria consider the likelihood of the failure of both a rated obligor and a bank LOC provider. The methodology results in a long-term rating that is up to two notches higher than the stronger of the two credits if the following conditions are met: (1) both entities have a rating of 'A' or higher; (2) the transaction is structured such that payments from both the municipal issuer and the bank are in the flow of funds and both entities would have to fail to perform before the bonds defaulted; and (3) the credit of the bank and the rated obligor have no more than a medium degree of correlation. Fitch has determined a low degree of correlation between Sumitomo Mitsui Banking Corporation and the obligor which results in a rating of 'AA' for the bonds. If either the underlying bond rating or the bank rating were downgraded to 'A-' or lower, the dual-party pay criteria could no longer be applied, and the long term rating assigned to the bonds would then be adjusted to the higher of the bank rating and the underlying bond rating.
The long-term 'A+' rating for the Series 2005A3 and Series 2005B1 will be based on the higher of the underlying long-term rating assigned to the bonds by Fitch (currently rated 'A+', Stable Outlook), and the long-term rating assigned by Fitch to Mizuho Bank, Ltd. (rated 'A-/F1'/Stable Outlook).
The initial LOC stated expiration dates for the series 2005A2-1 and 2005B3 LOCs are Nov. 16, 2018 and Nov. 15, 2019 for the series 2005A3 and 2005B1 LOCs, unless extended or earlier terminated, during the weekly interest rate mode only. The short-term 'F1' rating will be based solely on the respective LOC. For information about the underlying credit rating see press release 'State of California General Obligation Bonds,' dated Oct. 7, 2015 available at 'www.fitchratings.com'.
Pursuant to the substitute LOCs, each respective bank is obligated to make regularly scheduled payments of principal of and interest on the bonds in addition to payments due upon maturity, and redemption, as well as purchase price for tendered bonds. Additionally, the bond obligor is in the flow of funds to make timely payments of principal and interest due upon maturity, and redemption.
The Sumitomo Mitsui Banking Corporation and Mizuho Bank, Ltd. substitute LOCs provide full and sufficient coverage of principal plus an amount equal to 35 days of accrued interest at a maximum rate of 11% based on a year of 365 days and purchase price for tendered bonds, while in the weekly rate modes. On the effective date, the Remarketing Agents for the bonds will be Jefferies LLC for the Series 2005A2-1, Mizuho Securities USA, Inc. for the Series 2005A3, Citigroup Global Markets Inc. for the Series 2005B1 and Merrill Lynch, Pierce, Fenner & Smith Incorporated for Series 2005B3.
RATING SENSITIVITIES
The long-term rating is tied to the Fitch long-term rating assigned to the bond obligor and the long-term rating that Fitch maintains on the respective substitute bank providing the LOC. Changes to one or both of these ratings may affect the long-term rating assigned to the bonds.
The short-term rating is exclusively tied to the short-term rating that Fitch maintains on the respective bank providing the substitute LOC and will reflect all changes to that rating.
Additional information is available at 'www.fitchratings.com'.
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