Bangkok--27 Aug--Standard & Poor's
Standard & Poor's Ratings Services placed its 'A' rating on Reno, Nev.'s outstanding general obligation bonds on CreditWatch with negative implications.
"The CreditWatch action reflects our view of the potential strain on the city's general fund related to city's previously issued series of taxable Fitzgerald lease revenue bonds, series 2007, which are unrated by Standard & Poor's," said Standard & Poor's credit analyst Bryan Moore.
The City of Reno owns a parcel of land, which, through a ground lease, Fitzgerald Reno Inc (Fitzgerald Gambling Corporation) leased in order to construct and operate a parking structure. The city leveraged the lease revenues from the ground lease by privately placing a $6.1 million variable-rate revenue bond with DEPFA bank. The variable rate is based off of the LIBOR index. Thus far, the average interest rate on the bonds has been near 1% versus the 5.75% assumed by management in the original structuring. This differential has resulted in the accumulation of approximately $480,000 in the revenue fund that can be used to pay future debt service. In addition, the city has a reserve fund of $775,000 on deposit with the trustee, DEPFA. The current amount outstanding on the series 2007 bonds is $6 million.
In October 2009, the lessee ceased making lease payments to the city due to financial difficulties, according to management. Although the city has continued to make debt service payments from funds on hand in the revenue fund, according to the ground lease, the lack of payment by the lessee could trigger a covenant default on the bonds; however, the city then entered a forbearance agreement with DEPFA to delay acceleration, which forbearance agreement expires on Sept. 16, 2010.
Management has stated that it believes the current forbearance agreement is likely to expire without any restructuring of the lease bonds. Should it expire, the bond ordinance provides that upon a covenant default and resulting acceleration, only pledged revenues, including amounts in the revenue fund, the bond fund, and the reserve fund shall be used to pay the lease bonds. Further, according to the bond ordinance, any request to replenish the reserve is to be made only to the extent that regularly scheduled requirements are due. It is within the discretion of the city council as to whether to approve or appropriate any amounts from the general fund to replenish the reserve; the council is not required to make the appropriations requested, nor does nonappropriation constitute an event of default under the resolution.
In the event that the forbearance agreement is renewed, management has stated that the city could continue to make payments from the revenue fund for approximately two years at the current rate LIBOR rate. Other options to repay the bonds include the city taking ownership of the garage and re-leasing it or selling the land and garage.
Over the next 90 days, we will continue to monitor the situation and attempt to obtain clarification of the city's intentions toward resolving this matter. Currently, we believe the ability or willingness of the city to honor its debt obligations is uncertain. At the close of fiscal 2010, estimated actuals provided by the city reflect $6.3 million available in the unrestricted general fund. We believe that the city's negative movement of general fund reserves, should they decline significantly as a result of resolving the series 2007 Fitzgerald lease revenue bonds obligation, could lead to downward pressure on the general obligation bonds, absent other mitigating factors.
RELATED CRITERIA AND RESEARCH
USPF Criteria: GO Debt, Oct. 12, 2006
Complete ratings information is available to RatingsDirect subscribers on the Global Credit Portal at www.globalcreditportal.com and RatingsDirect subscribers at www.ratingsdirect.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
Media Contact:
Ana Sandoval, New York (1) 212-438-5095,
[email protected]
Analyst Contacts:
Bryan A Moore, San Francisco (1) 415-371-5077
Paul Dyson, San Francisco (1) 415-371-5079