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Santa Monica-Malibu USD, CA -- Moody's downgrades SMMUSD and SFIDs' GOs to Aa1 and COPs to Aa3; assigns Aa2 issuer rating

Rating Action: Moody's downgrades SMMUSD and SFIDs' GOs to Aa1 and COPs to Aa3; assigns Aa2 issuer ratingGlobal Credit Research - 21 Apr 2021New York, April 21, 2021 -- Moody's Investors Service has assigned a Aa2 issuer rating to Santa Monica-Malibu USD, CA (SMMUSD). The issuer rating reflects the district's ability to repay debt and debt-like obligations without consideration of any pledge, security, or structural features. Concurrently, Moody's has downgraded the general obligation ratings to Aa1 from Aaa affecting roughly $707 million in SMMUSD district-wide bonds, $110 million of the district's School Facilities Improvement District No. 1 (Santa Monica Schools) bonds and about $35 million of School Facilities Improvement District No. 2 (Malibu Schools) bonds. Moody's also downgraded the rating on about $29 million of SMMUSD's Series 2020 Certificates of Participation to Aa3 from Aa1 and $3.2 million Series 2001 COPs to Aa3 from Aa2. The outlook on the district and SFIDs' long-term ratings is stable.RATINGS RATIONALESMMUSD's Aa2 issuer rating reflects the district's strong, coastal Los Angeles County (Aa1 stable) economy and the affluence of its residents, which is demonstrated by the district's very high adjusted resident income and full value per capita. The district has a diverse revenue structure and Basic Aid or Community Funded status, which largely insulates SMMUSD from the impact of its enrollment declines. The rating also incorporates the district's below-average fund balance position that will narrow further in fiscal 2021 and 2022. SMMUSD's debt, pension and OPEB liabilities are high and its fixed cost ratio is elevated.The Aa1 rating on SMMUSD's GO bonds is one notch higher than the issuer rating. The one notch distinction reflects California school district GO bond security features that include the physical separation through a "lockbox" for pledged property tax collections and a security interest created by statute.The Aa3 ratings on the SMMUSD's outstanding COPs are one notch below the issuer rating, reflecting abatement risk and the more essential leased asset of school buildings. The district covenants to include lease payments in annual budgets, and payments are not subject to appropriation risk. The downgrade of the district's 2020 COPs to Aa3 from Aa1 also reflects our new methodology, which no longer provides rating uplift for a dedicated revenue source supporting the COPs.The Aa1 GOULT ratings for SMMUSD's SFID#1 and SFID #2 reflect the very large and growing tax bases of each of the SFIDs, their respective resident affluence, and their moderate debt burdens. Despite only comprising a portion of the total SMMUSD's tax base, the tax bases supporting the sub areas remain uniquely large and affluent. The ratings also reflect California school district GO bond security features that include the physical separation through a "lockbox" for pledged property tax collections and a security interest created by statute.RATING OUTLOOKThe stable outlook reflects our expectation that the district's financial position will remain adequate for the rating level despite projected deficits in 2021 and 2022. Also SMMUSD's leverage profile will likely stay elevated as it continues to issue debt against its outstanding authorizations in the coming years.FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS- Material reduction to long-term liability and fixed cost burdens- Sustained and meaningful improvement to financial positionFACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS- Deterioration of financial position- Growth to long-term liabilities- Material tax base reductionLEGAL SECURITYThe district's general obligation bonds are secured by the levy of ad valorem taxes, unlimited as to rate or amount, upon all taxable property within the district. The portion of the levy restricted for debt service is collected, held and transferred directly to the paying agent by Los Angeles County on behalf of the district.The series 2020 COPs are secured by lease payments for the district's use and occupancy of Roosevelt and Franklin Elementary Schools. The 2020 COPs are further secured by a covenant of the district to apply its RDA facilities pass-through funds as the primary source of payment, which are expected to provide over healthy debt service coverage on the obligations. The 2001 COPs are secured by a lease payments for the district's use and occupancy of its administrative office facility.The general obligation bonds issued by the district on behalf of SFID#1 are secured by an unlimited ad valorem tax pledges on all taxable property within SFID#1. The general obligation bonds issued by the district on behalf of SFID#2 are secured by an unlimited ad valorem tax pledges on all taxable property within SFID #2.PROFILESanta Monica-Malibu Unified School District (SMMUSD) serves residents of the Cities of Santa Monica and Malibu, as well as a portion of unincorporated Los Angeles County (Aa1 stable). Located on the scenic Pacific Coast, the district encompasses about 29 square miles, with an estimated population of 111,822. The district currently operates 10 elementary schools, two middle schools, one K-8 school, one 6-12 school, one high school, one continuation high school, a regional occupation program, an adult education program, as well as child care and development centers, with estimated enrollment in fiscal 2020 of 10,098.School Facilities Improvement District (SFID) 1 covers the Santa Monica portion of the unified district, accounting for approximately 2/3 of the overall district's AV. SFID 2 covers the Malibu portion of the district, accounting for the remaining approximately 1/3 of the total AV. Together the two SFIDs cover the entire district.METHODOLOGYThe principal methodology used in these ratings was US K-12 Public School Districts Methodology published in January 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1202421. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor 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_1243406.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.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK 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. Joseph Manoleas Lead Analyst Regional PFG Northeast Moody's Investors Service, Inc. 405 Howard Street Suite 300 San Francisco 94105 US JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 David Strungis Additional Contact Regional PFG Chicago 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 © 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.CREDIT RATINGS ISSUED BY MOODY'S CREDIT RATINGS AFFILIATES ARE THEIR CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY’S (COLLECTIVELY, “PUBLICATIONS”) MAY INCLUDE SUCH CURRENT OPINIONS. MOODY’S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT OR IMPAIRMENT. SEE APPLICABLE MOODY’S RATING SYMBOLS AND DEFINITIONS PUBLICATION FOR INFORMATION ON THE TYPES OF CONTRACTUAL FINANCIAL OBLIGATIONS ADDRESSED BY MOODY’S CREDIT RATINGS. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS, NON-CREDIT ASSESSMENTS (“ASSESSMENTS”), AND OTHER OPINIONS INCLUDED IN MOODY’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY’S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY’S ANALYTICS, INC. AND/OR ITS AFFILIATES. 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MCO and Moody’s Investors Service also maintain policies and procedures to address the independence of Moody’s Investors Service credit ratings and credit rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold credit ratings from Moody’s Investors Service and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at www.moodys.com under the heading “Investor Relations — Corporate Governance — Director and Shareholder Affiliation Policy.”Additional terms for Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY’S affiliate, Moody’s Investors Service Pty Limited ABN 61 003 399 657AFSL 336969 and/or Moody’s Analytics Australia Pty Ltd ABN 94 105 136 972 AFSL 383569 (as applicable). This document is intended to be provided only to “wholesale clients” within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you represent to MOODY’S that you are, or are accessing the document as a representative of, a “wholesale client” and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to “retail clients” within the meaning of section 761G of the Corporations Act 2001. MOODY’S credit rating is an opinion as to the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail investors.Additional terms for Japan only: Moody's Japan K.K. (“MJKK”) is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody’s Overseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody’s SF Japan K.K. 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MJKK and MSFJ are credit rating agencies registered with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively.MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any credit rating, agreed to pay to MJKK or MSFJ (as applicable) for credit ratings opinions and services rendered by it fees ranging from JPY125,000 to approximately JPY550,000,000.MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements. ​

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