OREANDA-NEWS. Fitch Ratings has assigned the following ratings of the Successor Agency to the Redevelopment Agency of the City of Pittsburg, California's (the agency) tax allocation bonds (TABs):

--Approximately $190 million refunding subordinate TABs series 2016 series A, series B (taxable), and series C (forward delivery) 'BBB-';
--Approximately $14 million refunding housing TABs series 2016 series A 'BBB+'.

In addition, Fitch takes the following rating actions:

--$89.8 million senior TABs series 1999 and 2014 upgraded to 'A+' from 'A';
--$11 million housing TABs series 2004 A and 2006 A upgraded to 'BBB+' from 'BBB';
--$117.6 million subordinate TABs series 2004A (being refunded) underlying rating affirmed at 'BBB-';
--$142.3 million subordinate TABs (taxable) series 2006B and subordinate refunding TABs series 2006C and 2008A (being refunded) affirmed at 'BB+'.

The Rating Outlook on the 2016 refunding subordinate TABs is Positive. The Rating Outlook on the housing TABs and senior TABs is Stable.

SECURITY

The senior and subordinate TABs are payable from a senior and subordinate lien, respectively, on non-housing tax increment revenues, net of county administrative fees, and are additionally payable per statute from former housing revenues on a subordinate basis to housing TABs.

The housing TABs are payable from the 20% housing set-aside
revenues derived from a senior lien on all incremental
property tax revenues in Los Medanos sub areas II and III.

KEY RATING DRIVERS

EXPECTED COVERAGE IMPROVEMENT: The Positive Outlook on the subordinate non-housing TABs reflects the refunding benefits including the elimination of variable-rate and swap exposure, and expected lower maximum annual debt service (MADS), subject to market conditions. The assessed value (AV) cushion (defined as the decline in AV to reach 1x MADS) is expected to improve from 16% to about 21% after the refunding.

GROWING ASSESSED VALUE, REDUCED APPEALS: The upgrades on the senior non-housing and housing bonds are prompted by continued tax base growth, expected lower debt service after refunding, and a reduction in outstanding appeals amount, resulting in improved debt service coverage (DSC) ratios.

TAX BASE WEAKNESS: The rating levels reflect sound to high maximum annual debt service (MADS) coverage, weighed down by significant industrial taxpayer concentration with frequent appeals, and historically high tax base volatility.

RATING SENSITIVITIES

TAX BASE/DSC PERFORMANCE: The ratings may change, depending on the performance and sustainability of the project area's tax base and DSC.

COVERAGE IMPROVEMENT: An upgrade on the subordinate non-housing bonds is likely if sufficient coverage improvement is achieved due to significant MADS savings at refunding or material tax base strengthening for fiscal 2017.

CREDIT PROFILE

Pittsburg is in northern Contra Costa County and benefits from its location within the large and diverse San Francisco Bay Area employment market and the presence of several large industrial enterprises. Most local economic indicators are weak despite the city's geographic advantages. The project area comprises a large 6,562 acres, making up 54% of the city's area and 72% of the city's fiscal 2016 AV.

IMPROVED SUB COVERAGE, REDUCED APPEALS

The project area's fiscal 2016 AV increased a solid 6.5%, following a 7.9% increase in fiscal 2015. Recent positive AV performance and reduced estimated debt service increased all-in MADS coverage on non-housing bonds to 1.3x, a significant improvement from below 1x in prior years, based on refunding debt service estimates. Similarly, the AV cushion rose to an adequate 21% from a barely sufficient 4% in fiscal 2015.

Outstanding appeals dropped to $39 million of potential reduction in value from $126 million last year, as the local real estate market recovers. The estimated AV loss from granted appeals no longer makes a material difference to coverage ratios.

Surplus housing revenue (the original 20% set-aside minus housing TABs debt service) is assumed to be available to the non-housing bonds, and is included in the coverage and AV cushion calculations.

VERY HIGH SENIOR COVERAGE

Senior non-housing bonds are not part of the refunding, and MADS coverage was boosted by recent positive AV performance, to 3.1x in fiscal 2016 from 2.6x in 2014. AV cushion went up to 62% from 59%, a more comparable level to its 'A+' peers. Furthermore, the top 10 taxpayers now account for 24% of total project area AV, from 33% in 2014, due to recent AV growth as well as value reductions of top industrial properties.

SOUND HOUSING COVERAGE

Los Medanos sub areas II and III (the entire project area excluding Los Medanos sub area I), from which the housing TABs tax increment is derived, enjoyed accelerated AV growth of 8.8% in fiscal 2015 and 15.4% in fiscal 2016, resulting in increases in MADS coverage to 1.5x from 1.4x, and AV cushion to 33% from 26% in 2015. In addition, Los Medanos sub areas II and III only has one pending appeals with a very limited $360,400 value at risk.

Housing TABs series 2004A is expected to be refunded while housing bonds series 2006A will remain outstanding. Housing TABs debt service is estimated to increase slightly after refunding, in exchange for a shortened final maturity.

POSITIVE AV TREND

AV levels in the near future are likely to benefit from increased construction levels, which could add 2% to AV per year by the city's estimates. New housing construction is proceeding at a pace of over 200 single family homes annually. The city has approved over 3,000 new housing units within the project area, and expects thousands more over time given the availability of vacant land and in-fill development opportunities. A portion of anticipated projects are related to a planned Bay Area Rapid Transit rail extension into the project area.

The city's home values are increasing, but growth has slowed, to 11% year-over-year, compared with 20% a year ago, according to the Zillow home price index. AV increases for some of these additions will be limited to the Prop 13 cap (typically 2% annually), but resales and properties subject to temporary Prop 8 reductions will reflect the full appreciation.

TAX BASE WEAKNESS

Despite the positive momentum mentioned above, inherent tax base weakness remains, evidenced by the relatively late start of AV recovery, and significant peak-to-trough decline. AV dropped a cumulative 20% between fiscal 2008 and fiscal 2013.

In addition, the top 10 taxpayers account for 24% of the AV (25% of incremental value, or IV) and include Delta/Calpine power plants (12% of AV), and industrial properties owned by United Spiral (1%) and Koch (1%). Some of the top taxpayers were successful in reducing their AV every year during the recession through the appeal process, with a lagged effect on tax increment revenues.

For Los Medanos sub areas II and III, concentration numbers are 36% of the AV and 37% of IV, led by Delta/Calpine (18% of AV), a residential development (6%), and Century Plaza (4%). Peak-to-trough AV decline was also 20% between 2008 and 2014.

REFUNDING, ELIMINATION OF VARIABLE RATE RISKS

The planned refunding will fix out and eliminate all variable rate debt and related risks, including bank bonds conversion risk with much higher interest rates, LOC renewal and fee hike risk, cost of setting aside reserves, and mark-to-market swap termination fees. An estimated total of $49 million reserves (including over $32 million for sub 2004A TABs) are expected to be released at closing, replaced by surety bonds for the 2016 refunding bonds. The estimated $16.6 million of swap termination cost will be paid from bond proceeds at closing.

The refunding has been approved by the state department of finance. The released reserves will be used to reduce par amounts. In addition, the elimination of LOC and remarketing fees may reduce debt service, which in turn boosts coverage ratios.