News Column

Fitch Rates LA County Regional Fin Auth Insured Rev Bonds 'A'

May 30, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings assigns an 'A' rating to $143,665,000Los Angeles County Regional Financing Authority insured revenue bonds (MonteCedro Inc. project), based on the support provided by the Cal-Mortgage Loan Insurance Division.

The bonds are expected to sell via negotiated sale the week of June 2, 2014.

The Rating Outlook is Stable.

SECURITY

The bonds will be insured by the State of California Office of Statewide Health Planning and Development (OSHPD). If moneys are not available to pay debt service, OSHPD 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.

KEY RATING DRIVERS

STATE ENHANCEMENT LINKED TO GO RATING: The rating is based on the support provided by the Cal-Mortgage Loan Insurance Division of the State of California. If defaults on loans deplete the reserve balance 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.

IMPROVED FISCAL MANAGEMENT: Institutionalized changes to California's fiscal management in recent years, combined with the ongoing economic and revenue recovery have enabled the state to materially improve its overall fiscal standing. Notable progress includes timely, more structurally sound budgets, spending restraint, and sizable reductions in budgetary debt. Fitch upgraded the state's GO rating to 'A', from 'A-', on Aug. 5, 2013.

WEALTHY, DIVERSE ECONOMY: The economy is wealthy and unmatched among U.S. states in its size and diversity. After severe, widespread recessionary conditions, growth has resumed, including in California's housing market.

MODERATE DEBT BURDEN: Tax-supported debt is moderate, although it has grown in the last decade for infrastructure needs and budgetary borrowing. Pension funded ratios have declined and contributions to the teacher system remain inadequate, but the state has instituted some benefit reforms.

CYCLICAL REVENUES AND CASH FLOWS: State finances are subject to periodic, severe budget and cash flow stress due to economic cyclicality, revenue volatility tied to personal income taxes, carried-over structural imbalances, a lack of reserves, and institutional inflexibility. The state expanded its ability to manage cash flow weakness during the last downturn, and other progress made to date can be expected to make the effects of future downturns more manageable.

TANGIBLE STRUCTURAL PROGRESS: Deep recurring spending cuts in recent adopted budgets and a restrained approach to restoring past cuts have significantly lowered the state's structural imbalance. Nevertheless, the state carries a heavy burden of budgetary borrowing from the last two fiscal crises and its historical difficulty achieving and sustaining budgetary solutions poses an ongoing risk.

INITIATIVES LIMIT FLEXIBILITY: Voter initiatives have reduced the state's discretion to effectively manage budgetary challenges over time. However, more recent initiatives authorizing a simple legislative majority to approve spending and temporarily raising tax revenues have been instrumental to current fiscal progress.

RATING SENSITIVITIES

PROGRAM CHANGES OR SHIFTS IN STATE CREDIT QUALITY: The rating is sensitive to changes to existing Cal-Mortgage program parameters, or to changes in the state's GO bond rating, to which this rating is linked.

CREDIT SUMMARY

Cal-Mortgage is a division of the State of California OSHPD. Cal-Mortgage's mission is to improve access to capital for qualifying health care facilities without cost to taxpayers. The agency primarily guarantees debt issued on behalf of nonrated and below-investment-grade health care institutions that demonstrate community need.

Bond proceeds will be used by MonteCedro, Inc., a non-profit public benefit corporation established to finance, construct, own and operate a 206-unit continuing care retirement facility in Altadena, California. Additionally, proceeds will provide for capitalized interest and for funding a debt service reserve.

The Cal-Mortgage program was originally authorized by voters in 1968. As of Nov. 30, 2013, the most recent monthly reporting date, Cal-Mortgage insured $1.7 billion in outstanding loans covering 113 facilities. The statutory maximum for insured risk is $3 billion, although this level has never been reached. Bonds insured by Cal-Mortgage generally require a debt service reserve, the aggregate balance of which totals $140.6 million as of Nov. 30, 2013. In addition, the bonds have access to the health facility construction loan insurance fund (HFCLIF), a special fund which receives fee and premium income, among other receipts, and is segregated from the state's general fund and unavailable for general fund cash flow purposes. The HFCLIF balance was $168.4 million as of Nov. 30, 2013.

In the event of a default by an insured borrower, debt service reserves and the HFCLIF balance are available to bondholders. If defaults on insured loans ever caused the HFCLIF and debt service reserves 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 bonds associated with the defaulted loan. These provisions support a rating on Cal-Mortgage equal to that of the state's GO bonds, currently rated 'A', with a Stable Outlook by Fitch.

For further information on the State of California's GO bond rating, please refer to Fitch's rating action commentary dated April 4, 2014, available on Fitch's website at 'www.fitchratings.com'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

'Tax-Supported Rating Criteria', dated 14 August 2012.

'U.S. State Government Tax-Supported Rating Criteria', dated 14 August 2012.

'State Credit Enhancement Program Criteria', dated 13 April 2013.

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. State Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686033

Rating Guidelines for State Credit Enhancement Programs

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=704880

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=832407

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

Karen Krop

Senior Director

+1-212-908-0661

Fitch Ratings

33 Whitehall Street

New York, NY 10004

or

Secondary Analyst

Douglas Offerman

Senior Director

+1-212-908-0661

or

Committee Chairperson

Marcy Block

Senior Director

+1-212-908-0239

or

Media Relations

Elizabeth Fogerty, +1-212-908-0526

elizabeth.fogerty@fitchratings.com


Source: Fitch Ratings


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