Wall Street firm says it will downgrade San Joaquin Hills if officials don't act soon

Dan Weikel
Los Angeles Times
About $1.9 billion in bonds sold to finance the San Joaquin Hills tollway might be downgraded to junk status if nothing is done to prevent the failing west Orange County turnpike from sliding into default, a Wall Street ratings agency warned this week.

Moody's Investors Service notified the Transportation Corridor Agencies in Irvine that it would reconsider the San Joaquin's Baa3 rating, which is Moody's lowest investment grade. A decision could be made within 90 days.

"We have placed the toll road bonds on our watch list for possible downgrade," said Maria Matesanz, Moody's lead analyst for the San Joaquin Hills corridor. "This is not a good thing."

Ratings are an important gauge of risk to investors because they indicate the ability of the issuing company or government agency to pay interest and principal. Financial experts say that downgrades to speculative ratings or so-called junk status can hurt individual investors and institutions, such as mutual funds, by lowering the market value of their bonds.

Analysts for the ratings agency said they took the action because TCA board members had postponed a decision on whether to merge the operations of the San Joaquin Hills and the successful Foothill-Eastern toll road in eastern Orange County.

The plan calls for the combined debt of the highways to be refinanced with a massive $4-billion bond issue at the current low interest rates.

Moody's views the proposed merger as a way to keep the San Joaquin Hills from defaulting on its bonds. The toll road, which has seen lower than expected traffic and revenue, could be in the first stages of default by 2006.

Last week, TCA board members delayed the vote on the merger for as long as 50 days to evaluate other financing possibilities. An ad hoc committee is scheduled to meet Thursday to begin discussing the options.

"Since we began studying consolidation two years ago, we knew that a long-term financial solution for the San Joaquin Hills was needed," said Clare Climaco, a TCA spokeswoman. The warning from Moody's "puts us on notice that they will continue to closely watch the board's actions."

Over the last year, two other Wall Street rating agencies — Standard & Poor's and Fitch IBCA — have lowered their ratings of San Joaquin Hills bonds to junk status. Moody's is the only agency to retain its investment grade rating for all the San Joaquin Hills bonds.