Moody's revises outlook on the Borough of Lavallette (NJ) to negative in the aftermath of Hurricane Sandy

Affirms Aa3 rating on roughly $7.8 million of outstanding General Obligation debt

LAVALLETTE (BOROUGH OF) NJ
Cities (including Towns, Villages and Townships)
NJ

NEW YORK, December 18, 2012 --Moody's Investors Service has revised the outlook on the Borough of Lavallette (NJ) to negative in the aftermath of Hurricane Sandy. We have affirmed the Aa3 rating on the borough's roughly $7.8 million of outstanding General Obligation debt, secured by an unlimited property tax pledge. The borough's gross debt includes $1.94 million of direct General Obligation bonds, $4.9 million of G.O.-guaranteed sewer bonds, and $970,000 of G.O.-guaranteed water bonds.

SUMMARY RATINGS RATIONALE

The Aa3 rating reflects the borough's moderately sized and wealthy tax base that is mostly seasonal; a modest debt burden that could increase based on capital needs, and a solid financial position characterized by a healthy Current Fund balance and large cash reserves.

The negative outlook incorporates some of the risks the borough faces in the aftermath of Hurricane Sandy, including the probable increase in debt burden, potential strains on cash, and long-term damage to the borough's tax base from destroyed properties.

STRENGTHS:

-Strong financial management with multi-year forecasting of expenditures

-Solid Current Fund balance and cash levels

CHALLENGES:

- Potential decline in assessed value due to Hurricane Sandy

- Probable increase in debt burden

DETAILED CREDIT DISCUSSION

HURRICANE SANDY CAUSES DAMAGE

Hurricane Sandy made landfall near the borough on Oct. 30, 2012, causing ocean surges that borough officials estimate resulted in more than $4 million of damage, or 58% of fiscal 2011 revenues. The borough has funded these costs through the placement of a $4 million note, which it intends to take out with a bond next year.

Although the debt service on this debt would be mostly reimbursable by the Federal Emergency Management Agency, the bonds would significantly increase the borough's debt burden. The borough's gross debt totals $11.7 million.

Further, the borough expects a reduction to assessed value of roughly $150 million, or 8% of AV. The reduction to the tax base, and the borough's ability to deal with its attendant pressures, will be an important factor in its rating going forward.

IMPROVED FINANCIAL OPERATIONS LEAD TO HEALTHY RESERVES

Moody's believes the borough's financial operations, though strong, could be challenged going forward given substantial expenditures related to Hurricane Sandy. Because of strong financial management, the borough typically runs budget surpluses and has built a large cash position. In 2011, the borough added $187,000 to its Current Fund balance, bringing the balance to $1.2 million, or 17.6% of revenues. On a cash basis, the borough's reserves equal a very strong 41.6% of revenues.

Hurricane Sandy caused substantial damage in the borough, leading the borough to issue a $4 million note and consider a bond ordinance next year for additional funding for repairs. Although we assume most of these costs will be reimbursed by the Federal Emergency Management Agency, the costs of this additional debt as well as temporary cash outlays pending reimbursements have the potential to place downward pressure on the borough's reserves, if only temporarily.

The borough's ability to rebuild in the wake of Hurricane Sandy without compromising its financial position will be a crucial determinant in its rating going forward.

SEASONAL TAX BASE EXHIBITS STRONG SOCIO-ECONOMIC CHARACTERISTICS; EXTENSIVE DAMAGE AFTER STORM

The borough's sizable $2.25 billion tax base in Ocean County (Aaa/Negative outlook) on the Barnegat Penninsula was hit hard during Hurricane Sandy. Management estimates a roughly $150 million reduction to assessed value (8% of the tax base), although we recognize the possibility of further declines to AV based on the storm.

The tax base is strong, with full value per capita equal to a very high $1.2 million and the median home value as of the 2000 Census equal to $323,100, or a very high 270.2% of the U.S. median.

MODEST DEBT BURDEN LIKELY TO INCREASE

The borough's net direct debt burden is currently modest, equal to 0.2%, which is well below peers. However, this burden is net of significant enterprise debt, including $4.9 million of G.O.-backed sewer bonds. All debt, including the $4 million note issued this month, is nearly $16 million, which is a still-manageable 0.7%.

The debt burden is likely to grow further, as the borough has more than $11 million of projects listed in a mostly debt-funded three-year capital plan, and is considering additional borrowing to cope with Hurricane Sandy costs.

OUTLOOK

The negative outlook reflects the probable increase in debt burden and reduction to tax base in the aftermath of Hurricane Sandy. The borough's ability to cope with these pressures will be an important factor in its rating going forward.

WHAT COULD CHANGE THE RATING - UP (REMOVAL OF NEGATIVE OUTLOOK)

- Buildup of fund balance to higher levels

-- Rebuilding of tax base after Hurricane Sandy

WHAT COULD CHANGE THE RATING - DOWN

-Draw-down of fund balance to levels no longer consistent with peers

- Reductions to AV larger than those currently contemplated

-- Increase in debt burden larger than that currently contemplated

KEY STATISTICS:

2010 population (estimated): 1,875 (29.6% decrease from 2000)

FY 2012 Full value: $2.25 billion

Net direct debt as % of full value: 0.2%

Overall debt as % of full value: 0.6%

Per capita personal income as % of the U.S. median: 143.8%

Median family income as % of the U.S. median: 121.9%

Full value per capita: $1.2 million

FY 2011 Total Current Fund balance (% of Revenues): $1.2 million (17.6%)

The principal methodology used in this rating was General Obligation Bonds Issued by U.S. Local Governments published in October 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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 rating action on the support provider and in relation to each particular 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.

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Dan Seymour
Lead Analyst
Public Finance Group
Moody's Investors Service

Geordie Thompson
Backup Analyst
Public Finance Group
Moody's Investors Service

Robert A. Kurtter
MANAGING_DIRECTOR
Public Finance Group
Moody's Investors Service

Julie Beglin
Additional Contact
Public Finance Group
Moody's Investors Service

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