Cerritos Redevelopment Agency, CA 2002B Subordinate-Lien TARB Rating Raised To 'BBB+' On Increased AV And Coverage

SAN FRANCISCO (S&P Global Ratings) March 22, 2019--S&P Global Ratings raised 
its long-term rating to 'BBB+' from 'BBB' on Cerritos Public Finance Authority,
 Calif.'s 2002B subordinate-lien tax allocation revenue bonds (TARBs), issued 
on behalf of the Successor Agency for the former Cerritos Redevelopment Agency.
 The outlook is stable.

The 2002B subordinate TARBs are secured by a subordinate lien on tax increment 
revenue net of 20% of the revenue formerly set aside for housing, and net of 
certain charges and pass-throughs. We note that these revenues are now 
collected under the redevelopment property tax trust fund after redevelopment 
agency dissolution occurred in 2012. Revenues are combined by the authority 
under separate loan agreements covering the Los Cerritos and Los Coyotes 
project areas, and a reserve fund is provided for under each loan agreement. 
The agency can, but is not required to, use surpluses in one project area to 
cure a deficiency in the other; therefore, the rating is based on the credit 
characteristics of the weaker project. The rating on the 2002B bonds reflects 
our assessment of the credit strength of the subordinate lien of Los Cerritos 
project area, which we consider to be of weaker credit quality. 

"The raised rating reflects our view of the continued growth in assessed value 
in both the Los Cerritos and Los Coyotes project areas, which has resulted in 
stronger coverage levels under each lien," said S&P Global Ratings credit 
analyst Li Yang. 

Limiting credit factors for the 2002B bonds include:

  • High taxpayer concentration from the Los Cerritos project area, with the 10 leading taxpayers making up roughly for 47% 7 of total project area assessed value (AV), and
  • A debt service reserve funded with an Ambac Surety bond that is currently speculative grade.
Credit strengths for the 2002B bonds include:

  • Pledged tax increment revenue generated from stable, primarily built-out project areas centrally located within the Los Angeles region;
  • A low base-to-total AV volatility ratio of 0.02 for both project areas, indicating limited exposure to future broad-based declines in total AV;
  • Good, 2.03x maximum annual debt service (MADS) coverage generated by the Los Cerritos project area and adequate MADS coverage of 1.72x generated by the Los Coyotes project area; and
  • A closed lien that prohibits the issuance of additional debt except for refunding purposes.
The stable outlook reflects our view of the consistent growth in project area 
AV, which has led to good MADS coverage by pledged revenue. Given the bonds' 
good coverage, the stabilization of project area AV, and the low volatility 
ratio, we don't expect to change the rating in the next two years.

Should AV continue to increase during the next two years, boosting coverage to 
levels that are comparable with those of higher-rated peers, we could raise 
the rating.

While not expected, should AV decline, resulting in lower coverage levels, we 
could lower the rating.

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