OREANDA-NEWS. S&P Global Ratings raised its issuer credit rating (ICR) on the City of Montebello, Calif. to 'A+' from 'A' and its rating on the city's lease revenue bonds to 'A' from 'A-'. The outlook is stable.

At the same time, S&P Global Ratings assigned its 'A' rating, and stable outlook, to the Montebello Public Financing Authority, Calif.'s lease revenue bonds, series 2016A (Montebello Home2 Suites by Hilton Hotel Project) issued on behalf of the City of Montebello.

"The upgrade is based on our assessment of the city's management practices and policies improving to adequate from weak," said S&P Global Ratings credit analyst Michael Stock.

The appropriation rating reflects our assessment of:The city's general creditworthiness; andA covenant to budget and appropriate lease payments for the debt. The rating on the authority's lease revenue bonds is one notch lower than the 'A+' ICR, in accordance with our criteria, to reflect the appropriation risk associated with appropriation-backed obligations. The bonds are payable from lease payments made by the city, to which the city has pledged project net revenues of the Montebello Hilton hotel, after payment of hotel operating costs and franchise fees and city general fund appropriations. Based on our assessment of the pledged revenue streams, the rating on the bonds reflects the strongest revenue stream, which we view as the general fund appropriation pledge of the city.

If hotel net revenues are insufficient, the bonds may be paid by reimbursable advances of subordinate tax increment revenue pursuant to a project agreement between the city and its redevelopment successor agency. Under the lease agreement, the city is obligated to budget and appropriate the full amount of the base rental payments for each year, offset by the amount of project net revenues and agency advances available for such base rental payments.

We believe that payment abatement risk is present under the lease agreement; however, the leased assets meet our criteria for seismic risk, and the lease requires the entity to carry 24 months of business interruption insurance.

The rating reflects our assessment of the following factors for the city:Adequate economy, with projected per capita effective buying income at 69.1% and market value per capita of $83,829, though that is advantageously gaining from access to a broad and diverse metropolitan statistical area (MSA); Adequate management, with "standard" financial policies and practices under our Financial Management Assessment methodology; Weak budgetary performance, with a slight operating surplus in the general fund but an operating deficit at the total governmental fund level in fiscal 2015; Very strong budgetary flexibility, with an available fund balance in fiscal 2015 of 15% of operating expenditures; Very strong liquidity, with total government available cash at 58.7% of total governmental fund expenditures and 9.4x governmental debt service, and access to external liquidity we consider strong; Very weak debt and contingent liability profile, with debt service carrying charges at 6.3% of expenditures and net direct debt that is 302.5% of total governmental fund revenue, as well as a large pension and other postemployment benefit (OPEB) obligation and the lack of a plan to sufficiently address the obligation; and Strong institutional framework score. The stable outlook is supported by our view of the city's still very strong available general fund balances, and very strong liquidity. We do not anticipate raising the ratings during the two-year outlook horizon, given the economy.

While not likely, we could raise the ratings shouldMontebello's flexibility increase significantly and its wealth and income numbers increase; and if its debt and contingent liability profile improve.

We could lower the ratings if the city's financial performance deteriorates and puts pressure on its flexibility. Should the hotels not perform, that would put significant pressure on Montebello's general fund.