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Fitch Maintains Rating Watch Negative on Santa Cruz County Redevelopment Agency, CA's TABs

SAN FRANCISCO--(BUSINESS WIRE)-- Fitch Ratings maintains the Rating Watch Negative for the following Santa Cruz County Redevelopment Agency (RDA), CA's tax allocation bonds (TABs):

--$157.6 million TABs, series 2000, 2000A, 2003, 2005A, 2005B, 2007, and 2007A, 'A'.

SECURITY

The TABs are secured by a first pledge and lien on net incremental property tax revenues generated by the sole Soquel/Live Oak project area. The revenues are net of county administration fees, tax-sharing agreements, AB 1290 pass-through obligations, and the statutory 20% housing set-aside, except for the portion of the TABs that financed low and moderate income housing qualifying projects. The debt service reserve requirement is satisfied through a combination of cash-funded reserve and surety bonds from Ambac Assurance Corporation and National Public Financial Guarantee Corporation.

KEY RATING DRIVERS

AB 1484 DISPUTE CONTINUES: The bonds remain on Negative Watch pending resolution of the on-going dispute between the Successor Agency (SA) for Santa Cruz County RDA and the state's Department of Finance (DOF). The dispute is regarding the repayment by the SA of property tax distributions from December 2011 and January 2012 that the state believes should have been directed to other taxing entities. The SA disputes the amount due ($11.6 million) and made only a partial payment ($599,079) to retain sufficient funds for its Sept. 1, 2012 debt service payment.

POTENTIAL RESOLUTION: DOF has stated that they currently do not intend to enforce non-payment penalties while the matter is in dispute. DOF further stated it is working on a process for handling the disputes on a case by case basis with more details expected to be released over the next few weeks. Fitch views this as a potentially positive development, depending on the process' details, but notes that until the dispute is resolved, risks to bondholders are elevated.

SEPTEMBER DEBT SERVICE PAYMENT MADE: The SA made the full September 1st debt service payment from available cash and did not draw on the debt service reserve fund. The SA previously stated in an informational release (Aug. 21, 2012) that failure to reach a resolution with DOF regarding its 1484 payment before the debt service payment was due might result in a draw on the debt service reserve fund in order to avoid potentially significant financial penalties to the county, as the sponsor of the SA. This concern was ameliorated by a letter from DOF (Aug. 27, 2012) stating that it did not intend to enforce penalties for not making the full AB 1484 payment. Fitch views DOF's letter as providing only temporary relief.

WHAT COULD TRIGGER A DOWNGRADE

A final resolution with DOF leaving the county without sufficient funds to continue to pay debt service could result in a downgrade, possibly to below investment grade.

For more information on the RDA, please see Fitch's latest release dated Aug. 23, 2012. They are available on Fitch's website at 'www.fitchratings.com'.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, and National Association of Realtors.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 14, 2012);

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research:

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

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Fitch Ratings
Primary Analyst
Matthew Reilly, +1-415-732-7572
Associate Director
Fitch, Inc.
650 California Street
San Francisco, CA 94133
or
Secondary Analyst
Karen Ribble, +1-415-732-5618
Director
or
Committee Chairperson
Jessalynn Moro, +1-212-908-0608
Managing Director
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Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings