KBRA Assigns AA Rating With Stable Outlook to Municipal Improvement Corporation of Los Angeles Lease Revenue Bonds, Series 2020 A, B, and C

NEW YORK--()--Kroll Bond Rating Agency (KBRA) assigns a long-term rating of AA with a Stable Outlook to the Municipal Improvement Corporation of Los Angeles (MICLA): Lease Revenue Bonds, Series 2020-A (Capital Equipment); Lease Revenue Bonds, Series 2020-B (Real Property); and Lease Revenue Refunding Bonds Series 2020-C (Real Property) (Federally Taxable). KBRA additionally affirms the long-term rating of AA+ and Stable Outlook on the City of Los Angeles, CA General Obligation Bonds.

A rating report will follow shortly.

Key Credit Considerations

KBRA continues to monitor the direct and indirect impacts of the COVID-19 virus. Click here to access KBRA’s ongoing research on the topic.

The rating was assigned because of the following key credit considerations:

Credit Positives

  • Experienced leadership team, established financial management practices, and history of proactive fiscal controls, as evidenced by the timely implementation of Reserve Fund transfers and cost containment measures to offset a projected FY 2021 budgetary shortfall of $400 million, and possibly more, related to the COVID-19 outbreak.
  • Manageable debt burden with minimal exposure to variable rate debt and no exposure to interest rate swaps.
  • Los Angeles, the second largest city in the U.S. by population, has a substantial tax base and a diverse economy that had exhibited a solid growth trend prior to the COVID-19 pandemic.

Credit Challenges

  • To date, the COVID-19 pandemic has resulted in severe declines in certain of the seven economically sensitive revenues relied upon by the City for General Fund operations.
  • New labor agreements for a substantial portion of the City’s workforce will impose a projected $1.2 billion cumulative shortfall over the next four years, further pressuring near term spending.
  • The pandemic has and will continue to impose unforeseen costs which could become a responsibility of the General Fund if not fully reimbursed.
  • The FY 2021 Budget’s four-year forecast projects annual budget gaps as high as $228 million through FY 2024.
  • Due to the recent downward revision of investment return assumptions used by the two City pension systems, increasing annual pension costs will likely outpace near term growth of overall governmental resources.

Rating Sensitivities

Upgrade

  • Trend of surplus operations and growth in unassigned general fund balance.

Downgrade

  • Trend of structural imbalance leading to significant decline in available fund balance and operating reserves.
  • Significant decline in funding progress with respect to the City’s pension and OBEB obligations.
  • Weak economic recovery following the COVID-19 crisis resulting in significant revenue reductions, declining reserves and structural imbalance.

     

ESG Considerations

When relevant to credit, ESG factors are incorporated into the credit analysis in the same manner as all other credit-relevant factors. Among the ESG factors that have impact on this rating analysis are:

  • Seismic Risk: KBRA has evaluated abatement risks related to seismic activity. Seismic risk is an Environmental factor related, among other things, to soil and geological conditions and to the leased properties’ proximity to fault lines.
  • Discussions in RD 4 reflect Social Factors. KBRA has examined the following areas for this credit: trends in population, education, income, poverty levels, employment, unemployment, residential and commercial mortgage delinquencies and the potential impact of the COVID-19 crisis.

More information on ESG Considerations for the Public Finance sector can be found here.

To access ratings and relevant documents, click here.

Disclosures

A description of all substantially material sources that were used to prepare the credit rating and information on the methodology(ies) (inclusive of any material models and sensitivity analyses of the relevant key rating assumptions, as applicable) used in determining the credit rating is available in the U.S. Information Disclosure Form located here.

Information on the meaning of each rating category can be located here.

Further disclosures relating to this rating action are available in the U.S. Information Disclosure Form referenced above. Additional information regarding KBRA policies, methodologies, rating scales and disclosures are available at www.kbra.com.

About KBRA

KBRA is a full-service credit rating agency registered as an NRSRO with the U.S. Securities and Exchange Commission. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized by the National Association of Insurance Commissioners as a Credit Rating Provider and is a certified Credit Rating Agency (CRA) with the European Securities and Markets Authority (ESMA). Kroll Bond Rating Agency Europe is registered with ESMA as a CRA.

Contacts

Analytical Contacts

Linda Vanderperre, Senior Analyst (Lead Analyst)
+1 (646) 731-2482
lvanderperre@kbra.com

Peter Scherer, Associate
+1 (646) 731-2325
pscherer@kbra.com

Harvey Zachem, Managing Director (Rating Committee Chair)
+1 (646) 731-2385
hzachem@kbra.com

Business Development Contact

Bill Baneky, Managing Director
+1 (646) 731-2409
bbaneky@kbra.com

James Kissane, Senior Director
+1 (213) 806-0026
jkissane@kbra.com

Contacts

Analytical Contacts

Linda Vanderperre, Senior Analyst (Lead Analyst)
+1 (646) 731-2482
lvanderperre@kbra.com

Peter Scherer, Associate
+1 (646) 731-2325
pscherer@kbra.com

Harvey Zachem, Managing Director (Rating Committee Chair)
+1 (646) 731-2385
hzachem@kbra.com

Business Development Contact

Bill Baneky, Managing Director
+1 (646) 731-2409
bbaneky@kbra.com

James Kissane, Senior Director
+1 (213) 806-0026
jkissane@kbra.com