LOS ANGELES -- Participation by California local governments in a statebacked credit enhancement program has dramatically increased this year after the program was all but ignored by issuers during its first three years of existence.
This year, nearly $200 million in long-term issuances by cities and counties guaranteed by the state's so-called Credit Plus program is expected, compared with just $16.9 million of such issuances from 1991 to 1993.
Authorized under a state law that took effect in January 1991, Credit Plus provides credit enhancement for cities and counties by intercepting their vehicle license fee revenues if they fail to make debt service payments on long-term obligations issued under the program.
From January through September, 11 issues totaling $133.9 million were sold with Credit Plus backing, according to the state controller's office, which administers the program. Eight more issues totaling $63.8 million, one of which is slated to close today, are scheduled to be sold in the fourth quarter.
In contrast, two issues totaling $16.9 million were sold under the Credit Plus program from the beginning of 1991 through the end of 1993. They were a $2.9 million issue in 1991 and a $14 million issue in 1992.
Issuers "are starting to come to understand the value" of Credit Plus, Steve Juarez, executive director of the California Debt Advisory Commission, said yesterday.
The commission is a state agency that tracks state and local public finance transactions. It compiled the Credit Plus transaction information from information provided by the controller's office.
The "underwriting and financial advisory community" are marketing the program, helping issuers "become aware of the potential value of Credit Plus," Juarez said.
Jeff Thiemann, a director with Standard & Poor's Corp., said: "It is a cheap form of credit enhancement, and given the financial stress that some communities are under, Credit Plus looks even more viable for those issuers. That's why we're seeing more issuers use it."
Credit Plus provides a guarantee for investors that local governments' motor vehicle license fees will be tapped to pay debt service on general obligation bonds, certificates of participation, and other leased-backed obligations if other revenue sources are not available.
If the locality fails to make a required payment, a trustee or similar paying agent is required to notify the controller, who then pulls the intercept trigger mechanism that diverts the issuer's allocated vehicle license fees to the investors.
Standard & Poor's provides a minimum rating of A to the debt of issuers that participate in Credit Plus. Moody's Investors Service does not rate the program.
Motor vehicle license fees are paid each year by every owner of a vehicle registered in California. Roughly $2 billion a year in such fees are distributed to cities and counties, apportioned on a population-based formula.
Theoretically, Sacramento lawmakers could at some point pass legislation that reallocates the funds to the state general fund, which might jeopardize the viability of Credit Plus in the future.
"I don't see that as a big risk," Jeff Frapwell, Kern County's assistant director of budget and finance, said yesterday. "If they were to do that, my gut reaction is they would probably grandfather" existing issuances under the program, he said.
Today, Kern County is scheduled to close on a $1.94 million certificate of participation issue with its first-ever use of Credit Plus backing. Proceeds of the negotiated issue will partially finance public library construction and capital improvements in Rosamond.
Kern County's COPs were structured to mature serially, with obligations priced to yield from 4.70% in 1996 to 6.50% in 2014.
In the transaction, Kern County used a so-called selective bidding process structured by the county's financial adviser, Leifer Capital Inc., in which bids were solicited from a list of pre-selected underwriters.
Six firms bid for the obligations, with Smith Barney Inc. submitting the lowest bid with a true interest cost of 6.29%. The runner-up bidder was Bear, Steams & Co., whose true interest cost bid was eight basis points higher than Smith Barney's, Frapwell said.
Kern County received an A rating from Standard & Poor's after agreeing to follow the rating agency's requirement that the county's annual vehicle license fee revenues exceed annual debt service payments by 2.5 times.
Kern County's motor vehicle license fee revenues are "in excess of $23 million a year," Frapwell said. The annual debt service on the certificates is about $180,000.
Kern County usually receives A-minus ratings from Standard & Poor's on lease transactions, but Frapwell said in this case -- without credit enhancement -- he believes a BBB rating was possible because of credit concerns about "project essentiality."
Frapwell said county supervisors in the future might not "continue to appropriate debt service for library facilities" under certain financial scenarios because "libraries don't rank as high up on the essentiality priority list as a sheriff's substation or a main courthouse."
Because "there was some doubt in my mind" that an A-minus rating assignment would have been made with the library transaction, signing up for Credit Plus -- and the automatic A rating -- provided the county with an opportunity "to get over that essentiality hurdle," Frapwell said.
Credit Plus appears to be of greatest benefit to two types of financings, said David Persselin, an associate with Leifer Capital.
The first category includes projects financed by COPs, which might be considered less essential to the issuer by the rating agencies and thus likely to receive a rating lower than issuances for more essential projects.
"The Kern County library project is a good example of this, since libraries are often considered less essential than hospitals, jails, and public protection facilities," Persselin said.
Credit Plus enhancement might also help issuers whose economic, financial, or debt burden led a rating agency to assign an underlying rating of less than A, he said.
"Smaller issuers with less diversified economies vulnerable to cyclic decreases in revenue, as well as larger issuers with relatively high debt burdens, both fall in this category," Persselin said.
Moody's has not provided a rating for any of the Credit Plus issues because of various inadequacies in the program, such as variations in annual vehicle license fee revenues, said Barbara Flickinger, a Moody's assistant director and manager.
A Moody's rating assumes that investors receive "full debt service payment on the day it is due. not after there has been a default," she said, noting that the Credit Plus intercept mechanism is triggered only after a trustee notifies the state of a default.
She said Moody's might someday provide a rating for an issue backed by Credit Plus, after weighing transaction documents on a "case-by-case basis" to be assured that "shortcomings [of Credit Plus] are addressed."
