TEXT-S&P Rates California Revenue Anticipation Notes 'SP-1+'

Thu Sep 1, 2011 7:26pm EDT

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(The following was released by the rating agency)

SAN FRANCISCO (Standard & Poor's) Sept. 1, 2011--Standard & Poor's Ratings Services assigned its 'SP-1+' rating to California's $5.4 billion 2011-2012 revenue anticipation notes (RANs), series A-1 and series A-2.

The 'SP-1+' rating reflects our view that the state has a strong capacity to retire its RANs at their maturity, scheduled for June 2012. The rating is based on the state's estimated final maturity of June 26, but we understand that a portion of the RANs may be sold in a separate series maturing in May 2012. The cash flow analysis below assumes the full $5.4 billion in RANs matures June 26, 2012.

The rating also incorporates our view of:

-- The state's smaller external cash flow borrowing amount for fiscal 2012 compared with recent fiscal years, which, when combined with reduced spending, results in what we consider to be very strong cash coverage (3.21x) of RAN repayment at maturity;

-- The capacity of state liquidity to absorb a variety of negative cash flow scenarios and still retain a strong ability to repay the notes at maturity;

-- The state controller's ability--and demonstrated willingness--to implement more aggressive cash management actions if necessary to preserve the state's ability to fund its priority payments, techniques we believe the controller would likely employ to retire RANs if he estimated additional flexibility were needed.

"The combined effect of a smaller cash flow borrowing, reduced general fund spending, the addition of some payment deferrals, active management of the timing of some disbursements, and bolstered alternative borrowable resources, in our view, help to produce very strong projected cash coverage of the RANs at maturity," said Standard & Poor's credit analyst Gabriel Petek. "In our analysis, the state's projected strong level of cash coverage helps allow the state to withstand a variety of our hypothetical stress scenarios, including some that are relatively severe, and still repay the RANs with an excess cash cushion," added Mr. Petek.

The authorizing note resolution allows that payment of the RANs may be made from any legally available state revenues attributable to the fiscal year ending June 30, 2012. The RANs are unsecured obligations payable from the state's general fund. Based on California government code, the RANs are payable following constitutionally required prior payments for schools, general obligation debt service, repayment of certain internal loans from other funds required by law, and various other legal requirements, including state wages, benefits, retirement obligation contributions, and lease payments that support lease revenue bonds. These priority payments represent approximately 86% of disbursements from the state general fund for fiscal 2012, according to the state.

We understand that unapplied money in the general fund including RAN proceeds will be used to retire the state's privately placed $5.4 billion of interim RANs. In July 2011, California borrowed cash via the interim RANs in anticipation of the potential for market disruptions stemming from negotiations between the U.S. Congress and the President over increasing the federal debt ceiling. External borrowing for cash flow is an integral part of the state's cash management given its nonaligned receipt and disbursement pattern.

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