Tuesday, June 16, 2009

S&P Fires First Shot In Upcoming California Economic Collapse

With the state a self-disclosed 50 days away from complete financial ruin, it was a matter of time before the "forward" looking rating agencies decided to take some action. Not surprisingly, it was S&P which has decided to splinter itself from the other sycophants, especially in the TALF quad-A re-rating of uber-toxic CRE.

From the negative watch report issued yesterday:
Standard & Poor's Ratings

Services placed its 'A' rating on California's general fund-supported general obligation (GO) debt, and its 'A-' rating on the state's appropriation-backed lease revenue debt, on CreditWatch with negative implications reflecting our assessment of the state's projected depletion of cash by the end of July 2009 absent the adoption of a significant revision to the fiscal 2010 budget. Although we continue to believe the state retains a fundamental capacity to meet its debt service, insufficient or untimely adoption of budget reforms serve to increase the risk of missed payments in our view.

This action affects approximately $59 billion of GO debt and $8.1 billion of appropriation debt.

Both the timing and magnitude of the state's impending liquidity shortfall raise significant credit concerns, in our view, particularly if the state were to begin fiscal 2010 without having meaningful budget revisions in place. We believe that without budget revisions, the state may need to defer (or issue registered warrants in lieu of making) cash payments for certain lower-priority obligations (such as vendors, student aid, and tax refunds) in order to preserve cash for required payments for education and debt service. Were the state to do this, or if it were to adopt a budget package that relied on assumptions that we regard as too optimistic or that relied on mechanisms for bridging the projected shortfall through at least fiscal 2010 that we regard as unreliable, we may consider lower ratings. The risk of any of these scenarios occurring underpins our placement of the state's ratings on CreditWatch with negative implications.

With the specter of approaching payment deferrals or issuance of registered warrants, the magnitude of the cash and revenue problem, and the limited amount of time left within which to make meaningful budget reform, downward pressure on the state's rating is intensifying, in our view. A failure to address the structural budget gap leading to significant use of registered warrants, payment delays, and more acute liquidity strain could cause the rating to fall below the 'A' category.
It is a good thing states have those highly solvent monolines insuring their debt or otherwise all hell just might break loose. Not to worry, the S&P action will likely be followed by a strong upgrade from Moody's as it hopes to single-handedly schmooze its way into Bernanke's Cottonelle stash. To aid this concerted effort, the rating agency is allegedly working on its new marketing campaign "Moody's - we have once again thrown away all rating letters except A."

In the meantime, Cali CDS were last seen turning the corner at 300 bps. Will Geithner please bail out Arnold already and end all the suspense.

hat tip Edward and Credit Trader
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