LOS ANGELES -- In a triple whammy, the three major credit rating agencies Friday downgraded about $18.4 billion of California general obligation bonds.
Standard & Poor's dropped its long-term rating on the state's bonds to A from A-plus, Moody's Investors Service lowered its rating to A1 from Aa, and Fitch Investors Service downgraded the state to A from AA. In addition Moody's revised California's lease revenue bond rating to A from A1.
The actions were based on the state's inability to erase its $3.8 billion accumulated deficit, among a number of other fiscal uncertainties, the rating agencies said.
The agencies also announced rating assignments to California's $4 billion of revenue anticipation warrants scheduled to be sold in two series via competitive bid Wednesday.
Standard & Poor's assigned its SP1 rating to the Series C Raws, a notch below its highest short-term rating, and provided an SP-2 assessment to the Series D Raws. Moody's rated the Series C Raws MIG-1, and the Series D Raws MIG-3. Fitch rated Series C Fl-plus, but said the Series D Raws were left unrated.
The Raws' Series C is enhanced by a global bank syndicate, and Series D is unenhanced. Both series mature on April 25, 1996.
"The MIG-3 rating reflects the expectation of full and timely payment of the warrants, and the uncertainties associated with the projected cash flow, and an untested budget adjustment mechanism," Moody's said in a release.
Also Friday, Standard & Poor's assigned its SP1-plus rating to $3 billion of revenue anticipation notes scheduled to be sold via negotiation on July 27. The Rans mature on June 28, 1995.
Moody's plans to rate the Rans this week, Moody's vice president Renee Boicourt said. She expected they would receive the "highest shortterm rating."
Fitch assigned a conditional F1plus rating to the Rans.
State Treasurer Kathleen Brown said Friday that she was expecting Moody's GO downgrade, but Standard & Poor's GO bond downgrade "is somewhat unexpected news."
"I don't think it should have been a surprise," said Steven Zimmermann, a managing director at Standard & Poor's. He said the downgrade was foreshadowed last February when the rating agency changed the state's outlook to negative from stable.
After analyzing the spending plan for the fiscal year that began July 1, "we have a picture now of how the state is planning to deal with things over two years, and we felt we had enough information to make a ratings change," Zimmermann said.
Standard & Poor's last downgraded California in July 1992, when it lowered the state's GO rating to Aplus from AA. Following Friday's rating action, Standard & Poor's once again placed California's outlook in the stable category.
Brown told reporters during a telephone press conference that the three agencies' actions on California's long-term ratings should have no bearing on market reaction to this week's sale of Raws or next week's issuance of Rans. The two borrowings are part of an unprecedented twoyear cash management program.
Because "the foreign and domestic banks ... are standing behind those [Series C] notes, those should not be at all difficult to sell," Brown said. While California will pay more than $30 million to the credit providers, the enhancement makes the obligations "quite secure," she said.
Brown said the SP-2 rating on the unenhanced portion from Standard & Poor's was "a good rating."
Joseph Rosenblum, director of municipal credit research of Sanford C. Bernstein & Co., said Friday he expects "pretty decent demand" from investors for the Raws.
Friday was "truly a grim day in the Golden State," Brown told reporters Friday. California has gone "from the highest ranking to among the worst in the nation," Brown said. "Today we are now at the bottom of the barrow, tied with Louisiana, and just above New York State."
Standard & Poor's said, "The A rating is not lower due to the broad and diverse nature of the California economy, the brightening prospects for economic improvement and revenue growth after a severe recession, and the profess made to date in climbing to break-even financial operations, even as the accumulated deficit continues."
Among the factors leading to a lowered rating were the state's "continuing deferral of substantial portions of its estimated $3.8 billion accumulated deficit, including off-book 'loans' to schools," Standard & Poor's said.
Other problems for the state, the rating agency said, are its "continuing structural budgetary constraints," including a state constitutional provision that it guarantee funding for kindergarten through 14th grade education.
Also of concern, Standard & Poor's said, is the state's "overly optimistic expectation of federal aid to balance fiscal 1995's budget and fiscal 1996's cash flow projections."
Finally, the agency cited California's "reliance upon a blunt trigger mechanism to reduce spending if the assumptions prove to be inflated."
The trigger requires automatic across-the-board cuts if the budget problems are not addressed by the state's political leadership.
The trigger was required by the bank consortium to provide credit support to the Raw sale. But Standard & Poor's said reliance on the mechanism to reduce spending could cause "potentially draconian automatic cuts" disrupting state operations, especially in fiscal 1996.
Standard & Poor's on Friday also affirmed its SP1-plus ratings on two series of outstanding Raws totaling $3.2 billion. One series matures on July 26, and the second series matures in December. The Raws were issue last February