Moody's reacts to Stockton bankruptcy by downgrading Solano rating

Posted in the Vallejo Forum


Vallejo, CA

#1 Apr 2, 2013
Moody's reacts to Stockton bankruptcy by downgrading Solano rating

Anticipation of a judge's decision to allow the city of Stockton to enter bankruptcy had an immediate local effect, as Moody's Investors Service downgraded Solano County's rating on existing pension obligation bonds.

Moody's changed perspective on the overall use of pension obligation bonds resulted in its March 29 decision to downgrade its rating of Solano County's bonds, from A1 from Aa3. The new perspective reflects the rating agency's evaluation of the overall market risk of pension obligation bonds as a financing instrument, and is not necessarily a direct reflection of the county's credit worthiness, county officials said.

"The move was widely expected as the rating agency had previously announced a changed view on the overall use of pledging General Fund dollars to support the repayment of POBs vs. the issuance of general obligation bonds, which have a dedicated funding source," the county said in a press release.

The change in rating criteria was prompted by the City of Stockton's bankruptcy process and a review of other at-risk cities that have issued pension obligation bonds, according to staff.

"This effects the cost for the county to go after future pension obligation bonds, which isn't expected," said Stephen Pierce, public communications officer for Solano County. "There are external forces driving the downgrade."

Moody's stated that it believes this pledge for POBs is "relatively less secure than our prior estimates, both in terms of probability of default and likely losses in the event of default."

Moody's looked at $176.5 million in total county debt, but only down graded the rating related to pension obligation bonds, which amounted to $69 million as of June 2012.

In the same announcement, the rating agency affirmed the County's Aa2 issuer rating and the County's A1 certificates of participation with an outlook of "stable."

"While we are disappointed that the county's POB rating dipped modestly as a result of external market conditions, we are pleased to see that the rating agency recognized our commitment to prudent financial management by reaffirming our Aa2 issuer rating and A1 certificate of participation rating," said County Administrator Birgitta Corsello.

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