Fitch Downgrades Pittsburg RDA, CA Sub TABs to 'BB-'; Negative Outlook; Senior TABs on Watch

Fitch Ratings has downgraded Pittsburg Redevelopment Agency, California's (the agency) subordinate tax allocation bonds (TABs) as follows:

--$144.2 million subordinate non-housing TABs to 'BB-' from 'BB+'.

The Rating Outlook is Negative.

In addition, Fitch has placed the agency's senior TABs, rated 'A', on Rating Watch Negative:

--$129 million senior non-housing TABs.

The 'BBB', Rating Watch Negative on the housing TABs remains unchanged.

SECURITY

The senior non-housing TABs are secured by all tax revenues allocable to the RDA collected within the sole project area, minus the 20% housing set-aside, and a county administrative fee. The subordinate non-housing TABs are secured by all taxes allocated to the RDA, a general bond reserve (additive to standard debt service reserve fund), and payments from swap contracts, minus senior debt service payments, the 20% housing set-aside, and the county administrative fee. The housing TABs are secured by a first lien on the 20% housing set-aside revenues.

KEY RATING DRIVERS

DISCONTINUATION OF CITY LOAN SPARKS DEBT SERVICE RESERVE FUND DRAW: The subordinate bonds' downgrade reflects the city's decision not to provide cash flow loans, resulting in a draw on the senior non-housing TABs' debt service reserve fund (DSRF), announced in an Aug. 9, 2012 material event notice. Further, management expects this to result in the depletion of the subordinate TABs' LOC-required supplemental DSRF by 2013.

WEAK COVERAGE; DIMINISHED CUSHION: The downgrade further reflects Fitch's expectation that the TABs' LOC-required supplemental DSRF will be depleted, providing a much lower financial cushion to deal with inadequate subordinate debt service coverage and concerns over parity TABs' (not Fitch-rated) variable rate structure.

ASSESSED VALUATION PRESSURES PERSIST: The Negative Outlook largely reflects Fitch's concern that continued tax base contraction over the near term could bring coverage levels even lower, to a level inconsistent with the 'BB-' rating.

POTENTIAL SENIOR DSRF REPLENISHMENT: The senior TABs' Rating Watch Negative largely reflects Fitch's concern over the draw on the DSRF. Fitch expects the DSRF to be replenished in January as the indenture clearly lays out the mechanism for DSRF replenishment, capacity exists on the ROPs for replenishment and management has stated its intent to replenish from January 2013 increment.

HOUSING BONDS NOT AFFECTED: Management has confirmed that there will be no draw on the housing TABs' DSRF related to the cessation of cash flow loans as sufficient cash exists in the housing fund to permanently close the related cash flow gap. Coverage on these bonds remains adequate.

WHAT COULD TRIGGER A RATING ACTION ON THE 'BB-' RATING ON SUBORDINATE NON-HOUSING BONDS

--COVERAGE DECLINES: Material AV declines exceeding Fitch's range of expectations and/or triggers associated with the agency's swap and LOC agreements exposing the agency to higher interest costs, could lower debt service coverage to a level inconsistent with the 'BB-' rating category.

WHAT COULD TRIGGER A RATING ACTION ON THE 'A' RATING ON SENIOR NON-HOUSING BONDS

--DSRF REPLENISHMENT ISSUES: An inability or unwillingness of the agency to replenish the senior non-housing TABs' DSRF would result in a downgrade.

CREDIT PROFILE

The agency historically has paid for debt service using cash advances from the city's investment pool, and later has reimbursed the pool with tax increment. City Council was notified recently that the AB 1X 26 cash flow loan repayment process treats repayment of these loans as subordinate to subordinate pass-through payments for which there may be insufficient future tax increment to fully pay. As a result, the city stopped providing cash flow loans for payment of the agency's TABs, resulting in a draw of $10 million from the senior non-housing TABs' $14.4 million DSRF on Aug. 1 to pay a scheduled debt service payment. On Aug. 8, the agency replenished $1.2 million of the reserve. A subordinate non-housing TAB debt service payment is due in September, for which the agency anticipates drawing $13.9 million from a $17.1 million LOC-required reserve. The LOC-required reserve is in addition to the TABs' indenture-required DSRF sized at $21.5 million.

City management expects the TABs' reserve to be fully replenished in January and for the cash flow gap to be permanently cured due to the senior TABs' strong maximum annual debt service (MADS) coverage which Fitch estimates at 2.6 times (x) in fiscal 2013. If the replenishment occurs as anticipated Fitch would likely remove the senior TABs' Rating Watch Negative. However, Fitch remains concerned regarding the agency's response to the vulnerable statutory environment caused by AB 1X 26 and AB 1484, particularly in light of its recent decision to discontinue cash flow loans.

Management is projecting that the subordinate TABs' LOC-required supplemental reserve will be fully depleted by September 2013 leaving just the TABs' indenture-required DSRF. The LOC-required reserve contains no replenishment provision and Fitch projects all-in MADS coverage in fiscal 2013 at just 0.98x. Fitch's coverage calculation does not include interest earnings, loan repayment revenues, supplemental assessment revenues, or any potential surplus housing revenues that may be available for debt service. The subordinate TABs' two-notch downgrade reflects the anticipated materially lower financial cushion that would be provided solely by the indenture-required DSRF given insufficient MADS coverage levels, the potential for swap and LOC complications, and four consecutive years of tax base contraction caused by the distressed local housing market.

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.

Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 15, 2011);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 15, 2011).

Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648898
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648842

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