(Adds details on rating, background)
June 25 Moody's Investors Service on Wednesday
upgraded its rating on California's general obligation debt to
"Aa3" from "A1," citing the state's improving financial position
and employment growth.
The one-notch upgrade stamps California GO debt with its
highest rating from Moody's since 2001. That was when the
dot-com bust hit the state's economy hard, prompting a series of
credit downgrades from which it has been slow to recover due to
years of chronic budget problems.
Moody's move comes just five days after Governor Jerry Brown
signed a $156.3 billion budget for the next fiscal year,
featuring an improved revenue outlook thanks to voter-approved
tax increases and a recovering economy. When Brown, a Democrat,
took office in 2011 from two-term Republican Arnold
Schwarzenegger, the state faced an 18-month budget gap of $25
"California in the last three years has made great strides
in managing its financial affairs," California Treasurer Bill
Lockyer said in a statement responding to the upgrade.
Along with the GO upgrade, the ratings agency also lifted
its ratings on most other categories of related debt by one
Moody's is the last of the three major ratings agencies to
upgrade California's rating since Brown began taking measures to
repair the state's poor fiscal position three years ago.
Standard & Poor's and Fitch Ratings both upgraded the state by
one notch to "A" last year, although their ratings are now two
notches below the equivalent Moody's rating.
As recently as 2010, Moody's considered California's
creditworthiness to be just three levels above speculative
grade, or junk. With the latest upgrade, the state would now be
considered a high-grade credit, although Moody's noted that
"Aa3" remains a relatively low rating for a U.S. state.
Of the 47 states rated by Moody's, just two - Illinois and
New Jersey - have lower ratings, while 42 have higher ratings.
"The Aa3 rating also reflects the state's volatile tax
revenue structure and governance restrictions," Moody's said. (bit.ly/1sFlQtt)
Moody's outlook on the state is stable.
California bonds were outperforming the wider municipal bond
market on Wednesday afternoon and its yield spread was the
narrowest in nearly seven years.
The yield on its GO bonds due in 2020 fell by 8 basis points
in secondary market trading to 1.6 percent from 1.68 percent on
Tuesday. The yield on comparable AAA-rated bonds fell by just 3
basis points, according to Thomson Reuters Municipal Market
(Reporting by Kanika Sikka in Bangalore; Writing by Dan Burns;
Editing by Maju Samuel and Dan Grebler)