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California (State of) -- Moody's assigns Aa2 to State of California Veterans G.O. bonds Series CT; outlook stable

Rating Action: Moody's assigns Aa2 to State of California Veterans G.O. bonds Series CT; outlook stable

Global Credit Research - 24 Aug 2020

New York, August 24, 2020 -- Moody's Investors Service has assigned a Aa2 rating to the $96.48 million State of California Veterans General Obligation Bonds ("Vets GO") , Series CT (Non-AMT). Moody's maintains a Aa2 rating on $778 million of outstanding bonds under this issuing program. The outlook is stable.

RATINGS RATIONALE

The Aa2 rating reflects the California Department of Veterans Affairs' (CalVet) consistently favorable balance sheet strength, the conservative composition of the single family loan portfolio with strong mortgage insurance support, a prudently structured bond program that limits external risks, and a capable management team experienced in addressing potentially more volatile market conditions. Recent operating trends that narrowed net program assets have since stabilized, with positive annual financial performance again projected with audited fiscal 2020 results.

We regard the coronavirus (COVID-19) outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. The coronavirus crisis is not a key driver for this rating action. We do not see any material immediate credit risks for CalVets as the number of loans under full forbearance remains modest. However, the situation surrounding coronavirus is rapidly evolving and the longer-term impact will depend on both the severity and duration of the crisis. If our view of the credit quality of the Department changes, we will update the rating and/or outlook at that time.

RATING OUTLOOK

The stable outlook reflects expectations that management maintains strong financial discipline supporting positive operating margins and further growth in net program assets. The outlook also incorporates management's continued sound administration of its loan portfolio to insulate the program from potentially adverse market changes.

FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATING

-Sustained and steady growth in program profitability

-Upgrade of the State's general obligation rating above the current Vets GO bonds

FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATING

-Substantial decline in balance sheet strength due to negative profitability

-Material shift in underwriting practices that introduces heightened loan performance risk

LEGAL SECURITY

The Vets GO bonds are general obligations of the State of California (rated Aa2/stable). Debt is first payable from monies transferred from the 1943 Fund into the Veterans Bond Payment Fund and, to the extent moneys in the Veterans Bond Payment Fund are insufficient, from the General Fund of the State. The 1943 Fund, which was established in the State Treasury by the Veterans Farm and Home Purchase Act of 1943, is the principal fund supporting the Department's veterans loan origination activities. Loan repayments are deposited into the 1943 Fund and are legally required to first be transferred to the Veterans Bond Payment Fund in the state treasury (bypassing the state's general fund) to pay debt service on the Vets GO Bonds, and secondarily to reimburse the State for any Vets GO Bond debt service payments made by the State. Only after full GO debt service deposits have been made to the Veterans Bond Payment Fund are resources available to support debt service on revenue bonds issued under the CalVet Home Purchase Revenue Bond program (Aa3/stable). This payment structure makes the Revenue Bonds' interest in the 1943 Fund subordinate to the Vets GO Bonds. The structure also protects bondholders from competing claims from the state on funds to be used for debt service on the Vets GO Bonds.

USE OF PROCEEDS

Proceeds of the Series CT Vets GO Bonds will both reimburse the Department for loans previously funded with program resources, and provide new money for future loan origination.

PROFILE

The Vets GO program, operated by CalVet, was established to provide affordable single family housing to military veterans in the State of California.

METHODOLOGY

The principal methodology used in this rating was US Housing Finance Agency Single-Family Housing Methodology published in October 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1154478. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

The rating has been disclosed to the rated entity or its designated agent (s) and issued with no amendment resulting from that disclosure.

This rating is solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Jeffrey Kaufmann Lead Analyst Housing Moody's Investors Service, Inc. 7 World Trade Center 250 Greenwich Street New York 10007 US JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Florence Zeman Additional Contact Housing JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653

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