|[October 03, 2013]
Fitch: New CAB Limitations Mostly Positive for CA School Districts
SAN FRANCISCO --(Business Wire)--
A recently signed bill (AB 182) imposes stricter structuring and
disclosure requirements on capital appreciation bonds (CABs) issued by
California school districts. Fitch Ratings views the bill as a credit
positive overall and believes it will mitigate the negative effects of
CABs on districts' debt profiles and reduce the volume of future CAB
issuances. However, the bill could lead to additional budgetary
pressures for some districts with pressing capital needs. The bill does
not apply retroactively. Please see 'Fitch: Capital Appreciation Bonds
May Pressure School Districts' for more information on CABs.
AB 182 allows for the continued issuance of CABs but imposes the
Faster Maturity: The maturity date for CABs will be capped at 25 years,
down substantially from 40 years. The stricter maturity cap mitigates
Fitch's concerns about CABs' tendency to slow amortization and tie up
tax rate flexibility.
Call Feature: All CABs must include call provisions. Historically most
CABs were issued as non-callable, potentially constraining debt capacity
for decades to come and locking in higher interest rates than current
interest bonds (CIBs). Although the call provision mitigates these
concerns, it is likely to raise interest costs.
Lower Interest to Face Value: The ratio of total debt payments to
principal cannot exceed a ratio of four to one. This represents a
material reduction as compared to some districts' issuances in recent
years that exceeded 10:1.
Tougher Discosure Requirements: Districts looking to issue CABs will
have to adopt bond resolutions at a public meeting with enhanced
disclosure requirements. These include the costs of compounding
interest, a cost comparison to CIBs, the reasons the CABs are being
recommended, and assessed valuation growth (AV) assumptions over the
life of the bonds. Fitch believes these requirements will shed more
light on the cost of CABs and the tax base growth assumptions that
Although Fitch views AB 182 as a credit positive overall, its
restrictions will limit the ability for some districts to finance their
capital needs and could lead to budgetary pressures. Many districts
issued CABs because recent years' AV losses diminished or eliminated
their capacity to issue CIBs under Proposition 39 tax rate limitations.
AB 182 will make it tougher for those districts to issue general
obligation bonds for pressing capital needs and some may resort to
lease-backed debt or pay-as-you-go capital spending. Unlike GO bonds
which are paid by a dedicated and unlimited property tax, lease and cash
capital financing would pressure operations by crowding out districts'
Additional information is available at 'www.fitchratings.com'.
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