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San Jose Financing Authority, CA -- Moody's assigns Aa2 and Aa3 to San Jose, CA's Lease Revenue Bonds Series 2020A and 2020B, respectively; outlook is stable

Rating Action: Moody's assigns Aa2 and Aa3 to San Jose, CA's Lease Revenue Bonds Series 2020A and 2020B, respectively; outlook is stable

Global Credit Research - 31 Aug 2020

New York, August 31, 2020 -- Moody's Investors Service has assigned a Aa2 rating to the City of San Jose's Taxable Lease Revenue Bonds, Series 2020A (Civic Center Refunding Project) and a Aa3 rating Taxable Lease Revenue Bonds, Series 2020B (Ice Centre Project). The expected par amounts are $356.9 million and $147.2 million, respectively. Concurrently, we affirmed the city's Aa1 GO rating affecting $469.0 million, as well as Aa2 and Aa3 lease revenue bond ratings affecting a total of $399.6 million. The outlook is stable.

RATINGS RATIONALE

The Aa1 GO rating incorporates the city's large and diverse tax base supported by the robust Bay Area economy and city residents' solid wealth indicators. The rating also reflects the city's strong reserves and liquidity, which are supported by management's adopted fiscal policies and conservative budgetary practices. These factors position the city well to manage through the coronavirus recession. Elevated pension and OPEB costs remain budgetary pressures. However, we expect that management will continue to implement the necessary strategies to fund these expenditures, while preserving the city's healthy financial position.

We regard the coronavirus 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 the City of San Jose, CA. While credit risks related to coronavirus are not immediate, given the city's currently very strong balance sheet, the longer-term impact will depend on both the severity and duration of the crisis.

The Aa2 leased back rating on the Taxable Lease Revenue Bonds, Series 2020A (Civic Center Refunding Project) is one notch lower than the Aa1 GO rating, reflecting the leased assets that we view as "more essential" and the California abatement lease legal structure absent a debt service reserve fund, which is credit negative. This negative credit factor is moderated by the leased asset, the Civic Center Complex. The Civic Center Complex has been built to standards that make it highly probable that the building can withstand a major earthquake, which helps to mitigate seismic risk.

The Aa2 lease-backed rating on the outstanding lease revenue bonds is one notch lower than the Aa1 GO rating, reflecting a standard California abatement lease legal structure and leased assets that we view as "more essential."

The Aa3 leased backed rating on the outstanding lease revenue bonds and Taxable Lease Revenue Bonds, Series 2020B (Ice Centre Project) is two notches lower than the Aa1 GO rating, reflecting a standard California abatement lease legal structure and leased assets that we view as "less essential." The leased asset for Series 2020B is the city's Ice Centre and there is a debt service reserve fund that will be funded at maximum annual debt service.

RATING OUTLOOK

The outlook is stable and reflects the city's large and diverse tax base that will continue to grow at a solid rate. However, the pace of growth over the next couple of years will likely be tempered because of the coronavirus pandemic. The outlook also incorporates management's demonstrated ability to preserve its financial position through challenging economic and financial cycles.

FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS

- Significant and sustained improvement in the city's fiscal position

- Material decrease in the city's unfunded pension and OPEB liabilities

FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS

- Erosion of the city's fiscal health

- Prolonged weakening of the city's economy

LEGAL SECURITY

The lease payments are payable from any source of legally available funds of the city, subject to abatement in the event of damage or destruction of the leased property.

The general obligation bonds are secured by an unlimited property tax pledge of all taxable property within the city boundaries.

USE OF PROCEEDS

The Taxable Lease Revenue Bonds, Series 2020A (Civic Center Refunding Project) will refund certain outstanding lease revenue bonds and an equipment lease as well as provide $4.8 million in new money to fund a project. The Taxable Lease Revenue Bonds, Series 2020B (Ice Centre Project) will finance the fourth expansion to the Ice Centre of San Jose and refund the city's outstanding Series 2008E lease revenue bonds.

PROFILE

San Jose is in Santa Clara County (Aa1 stable) and has a population of just over one million. The city is the largest city in Silicon Valley and is governed by a Manager-City Council governance structure.

METHODOLOGY

The principal methodology used in the lease ratings was the Lease, Appropriation, Moral Obligation and Comparable Debt of US State and Local Governments published in July 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1102364. The principal methodology used in the general obligation ratings was US Local Government General Obligation Debt published in July 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1230443. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

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

These ratings are 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.

Alexandra Cimmiyotti Lead Analyst Regional PFG West Moody's Investors Service, Inc. One Front Street Suite 1900 San Francisco 94111 US JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Adebola Kushimo Additional Contact Regional PFG Dallas 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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