LOS ANGELES -- Moody's Investors Service this week assigned its highest note rating to a pooled deal for schools in Los Angeles County, based on a technique that does not peg such ratings to a pool's weakest participants.
Moody's also said yesterday that state budget problems likely will lead to deeper cuts in school district budgets, but that it is incorporating this concern into ratings it assigns to school note deals for fiscal 1993.
The MIG-1 rating for $78.1 million of Los Angeles County School District and Community Colleges pooled tax and revenue anticipation notes "does not reflect the ~weak-link' concept used in Moody's traditional approach" for such pools because a letter of credit compensates for weaker participants, the agency said.
Under the weak-link approach, the creditworthiness of the weakest participant generally sets the overall rating for the pool. To enhance the rating in such cases, issuers often had to arrange bank letters of credit or bond insurance for the entire deal.
But Moody's assigned the Los Angeles County school pool its highest rating by weighing the credit characteristics of each participant and the fact that a letter of credit equal to $7 million, or 9% of the principal amount, will provide liquidity to cover any shortfall on the note repayment date.
"We expect that this approach will become more popular, although the size of the letter of credit may vary depending on the particular characteristics of each pool," Jeff Rizzo, managing director of regional ratings for Moody's, said in a statement.
Moody's previously applied the approach to rate an Indiana Bond Bank note issue, but it had not previously used the criteria for a Tran pool in California.
Using a similar approach, Moody's this week also assigned a MIG-1 rating to a $94.3 million note deal by the San Diego Area Local Governments. Standard & Poor's Corp. also gave the issue its highest note rating, using new criteria that also do not rely on the weak-link approach.
Regarding the prospect of a $5.7 billion state budget deficit by June 30, 1993, Moody's in a statement yesterday says it "has raised a strong possibility that funding for school districts may be cut substantially from what had been proposed in the governor's January budget."
Moody's said this development has raised questions about tax and revenue anticipation notes for school districts that the agency is in the process of rating, especially because "final budget decisions are not expected until July."
Moody's said it continues to provide Tran ratings for school districts, though it is supplementing its usual analysis with additional lines of questioning.
"In general, we believe that Trans issued in California offer some unique and inherent legal protections to noteholders, such as early segregation of funds for note repayment with segregated funds held by the county," the agency said.
The agency added that many school district officials have prepared realistic contingency plans to accommodate the budget uncertainties.
The agency said it does not expect it will have to revise short-term ratings later in the year because its discussions and analysis already assume a worst-case scenario.
