OREANDA-NEWS. July 14, 2015. Fitch Ratings upgrades the following San Jose Redevelopment Agency, CA (the agency) non-housing tax allocation bonds (TABs) to 'BBB' from 'BBB-':

--\\$1.5 billion merged area redevelopment projects TABs, series 1993, 1997, 1999, 2002, 2003, 2004A, 2005A, 2005B, 2006A-T, 2006B, 2006C, 2006D, 2007A-T, 2007B, 2008A, 2008B.

The Rating Outlook is Positive.

SECURITY
Pursuant to the indenture, the merged area TABs are secured by gross tax increment revenue from the project area net of certain senior pass-throughs and the 20% set-aside for housing. The TABs additionally are payable from the former 20% housing set-aside on a subordinate basis to any outstanding housing debt per dissolution statute. All TABs are also secured by debt service reserve funds; however, only the merged area redevelopment project TABs, series 2003 and 2008A and 2008B, benefit from a cash-funded reserve.

KEY RATING DRIVERS
UPGRADE REFLECTS IMPROVED COVERAGE: The upgrade reflects strong assessed value (AV) gains in fiscal 2015 and estimated for fiscal 2016 resulting in improved debt service coverage (DSC) of 1.47 times (x). When coupled with the closed lien, Fitch views the 28% AV cushion (defined as the required decline in AV required for sum sufficient DSC) as adequate for the rating level given expected moderate revenue volatility.

POSITIVE OUTLOOK: The Positive Outlook reflects the expectation that gains in DSC, primarily from tax base growth would result in a stronger AV cushion.

LIMITED IMPACT FROM ELEVATED APPEALS: Pending appeals remain elevated; however, if entirely granted at the estimated level in fiscal 2016, DSC would drop to a still sound 1.4x.

HIGHLY CONCENTRATED TAX BASE: Taxpayer and industry concentration in the volatile technology sector remains a concern. Fitch expects positive current real estate trends to add to the AV cushion, mitigating concerns about the impact of longer-term economic cyclicality on coverage.

RATING SENSITIVITIES
Fitch may take positive rating action if solid AV growth continues, resulting in materially increased DSC and AV cushion.

CREDIT PROFILE
San Jose, with a population of about one million, is located in the center of Silicon Valley, about 55 miles south of San Francisco. The agency's large merged project area covers over 8,000 acres or roughly 7% of the city acreage and 17% of city AV.

SAN JOSE ECONOMY, PROJECT AREA ENJOYING SOLID RECOVERY

San Jose's economy continues to improve markedly. Job growth remains solid at 4.6% from March 2014 to March 2015. The city and agency benefit from above-average economic indicators, including median household income at 134% and 154% of the state and national averages, respectively, and a poverty rate about 80% of the national average.

July 2015 home values increased about 10% year-over-year, according to Zillow. The local employment and residential real estate markets' strength translated into a robust 10% AV gain in fiscal 2016, a fifth consecutive year of AV gains. However, it is unclear to what extent these factors will impact the project area's predominantly commercial and industrial tax base. Fiscal 2017 AV will be determined by real estate values as of Jan. 1, 2016.

Recent project area AV performance has been positive but highlights the inherent volatility. After declining in fiscal 2011 and 2012 for an aggregate 8.8%, project area AV increased the next three fiscal years, and the county assessor recently reported that fiscal 2016 AV increased a robust 9.2%. These gains coincide with a solid recovery of the city's housing market and an expanding technology sector and brings the aggregate AV gain since the trough to 34%.

LARGE, HIGHLY CONCENTRATED PROJECT AREA

The merged project area is mature and sizeable, covering 28 noncontiguous square miles and spanning 20 miles north to south. The incremental value (IV) equals 21x the base year value, reducing somewhat the volatility in pledged revenues relative to declines in AV. The top 10 taxpayers make up a high 31.5% of IV, and most are in the high technology sector. Top taxpayers include companies such as Cisco Systems Inc., eBay, Hitachi and Adobe and others which are important to the regional economy. This sector has experienced significant volatility in recent years.

Also contributing to the volatility is the high level of personal property & equipment (PP&E), a component of unsecured AV. PP&E and unsecured property account for an estimated 14% and 19% of fiscal 2015 AV, respectively, down from peaks of 19% and 23%, in fiscal 2012.

SOUND DSC AND AV CUSHION

The solid fiscal 2016 AV gain raises Fitch-estimated fiscal 2016 coverage to 1.47x from 1.30x in fiscal 2015 and just over 1x in fiscal 2012. Fitch estimates AV could fall 27.8% from current levels before coverage would drop to 1.0x.

IMPROVING BUT STILL LARGE BACKLOG OF APPEALS REMAINS

Fitch believes long-term prospects for economic growth in the city and project area are favorable, but appeals may result in a somewhat uneven AV and pledged revenue recovery over the medium term. The number of appeals filed for fiscal 2014 (the latest date available) is down from its peak in fiscal 2011. However, the number and value of appeals outstanding remains elevated. The combined disputed value of all outstanding appeals is about \\$7.3 billion (30% of fiscal 2015 AV), down from \\$9.4 billion as of March 2012.

Since 2007 the assessor has granted an average of 13% of disputed amounts, which would equate to approximately 4% of fiscal 2016 AV if granted in a single year. The rating conservatively assumes this rate of appeals, despite solid improvement in real estate conditions and a marked reduction in granted appeals in fiscal 2014 compared to fiscal years 2010, 2011 and 2012.

OVERRIDE LAWSUIT RULED IN AGENCY'S FAVOR, BUT APPEALED

The successor agency (SA) filed a lawsuit in superior court against the county and the court ruled in favor of the agency in June 2014. The lawsuit would require that the county stop withholding an estimated \\$10.5 million (for fiscal 2016) in annual tax revenue derived from voter-approved tax overrides (0.045% of AV) the agency contends is pledged to bondholders.

Fitch has conservatively excluded override revenues in its DSC calculations. If the SA does receive the \\$10.5 million for fiscal 2016, Fitch estimates debt service coverage would rise to 1.54x and require a 31.3% decline to reach 1.x maximum annual debt service DSC.