Fitch Ratings assigns an 'A-' rating to approximately $80 million in California Health Facilities Financing Authority insured revenue bonds (Community Program for Persons with Developmental Disabilities), consisting of:
--$45 million series 2011A;
--$35 million taxable series 2011B.
The bonds are expected to sell via negotiated sale on Feb. 10, 2011.
The Rating Outlook is Stable.
RATING RATIONALE:
--The rating is based on the support provided by the Cal-Mortgage Loan Insurance Division of the State of California. If defaults on loans cause a depletion of reserve in the health facility construction loan insurance fund (HFCLIF), the state's treasurer is required to issue debentures on parity with the state's general obligation (GO) bonds. This results in a rating on par with that assigned to state GO bonds.
--The state's GO rating, at 'A-', reflects a large and persistent structural imbalance over the last decade that combined with pronounced revenue cyclicality periodically leads to acute budget crises.
--Institutional weaknesses, including inflexibility imposed by voter initiatives and a partisan policy-making environment, have repeatedly delayed action on addressing fiscal challenges, resulting in unsustainable budgetary solutions and exacerbating future-year budget making challenges.
--Expenditure pressures are significant, including for education, corrections and infrastructure, and driven in part by voter-approved measures and court mandates.
--The state's cash flow continues to experience stress, although expanded powers to defer certain disbursements have provided additional flexibility and the state has repeatedly acted to protect priority payments, including debt service.
--The economy is broad, diverse and wealthy, despite suffering through a very severe economic contraction. Economic growth is beginning to emerge, albeit slowly.
--Debt levels are manageable, but have grown rapidly with deficit borrowing and as longstanding infrastructure needs are addressed. Pension funding levels remain above average.
KEY RATING DRIVERS:
--Maintenance of existing Cal-Mortgage program parameters.
--The state's GO rating will be driven by economic and revenue performance achieving forecast assumptions, and its ability to manage continued budgetary and cash flow risks effectively.
SECURITY:
The bonds will be insured by the State of California Office of Statewide Health Planning and Development. If moneys are not available to pay debt service, the office will be obligated to continue to make payments on the bonds; if necessary, the state's treasurer will issue debentures to holders of the bonds fully and unconditionally guaranteed by the State of California.
CREDIT SUMMARY:
Cal-Mortgage is a division of the Office of Statewide Health Planning and Development of the State of California. Cal-Mortgage's mission is to improve access to capital for necessary health care facilities and services without cost to taxpayers. The agency primarily guarantees nonrated and below-investment grade health care credits that demonstrate community need.
As of Nov. 30, 2010, Cal-Mortgage insured $1.78 billion in outstanding loans covering 138 facilities, backed by $183 million held in the Health Facility Construction Loan Insurance Fund (the fund). Bonds insured by Cal-Mortgage also had $146.6 million in debt service reserves. If defaults on loans ever caused the fund to be depleted, statutes and transaction documents require the state treasurer to issue debentures on parity with the state's GO bonds in the amount of principal and interest due but not paid, at a payment schedule and coupon rate identical to those of the defaulted bonds. These provisions support a rating on Cal-Mortgage equal to that of the state's GO bonds, currently rated 'A-'.
Bond proceeds will be used for the Community Program for Persons with Developmental Disabilities, to refinance loans used to acquire and renovated 60 homes in the Bay Area for housing persons with developmental disabilities. The homes were renovated in conjunction with the legislatively-authorized Bay Area Housing Plan, under which approximately 230 developmentally disabled adults were shifted from institutional care to community-based housing.
For further information on the State of California's GO bond rating, please refer to Fitch's rating action commentary dated Nov. 8, 2010, available on Fitch's web site at 'www.fitchratings.com'.
Additional information is available at 'www.fitchratings.com'
In addition to the sources of information identified in the Tax-Supported Rating Criteria, this action was additionally informed by information from Bond Counsel, Underwriter.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria', dated Aug. 16, 2010.
--'State Credit Enhancement Program Criteria', Dec. 16, 2009.
--'U.S. State Government Tax-Supported Rating Criteria', dated Oct. 8, 2010.
For information on Build America Bonds, visit www.fitchratings.com/BABs.
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548605
U.S. State Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564546
State Credit Enhancement Program Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=491794
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