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Rating Update:

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

Global Credit Research - 18 Dec 2012

Affirms Aa3 General Obligation rating on roughly $9.4 million of outstanding debt

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

Opinion

NEW YORK, December 18, 2012 --Moody's Investors Service has revised the outlook on the Borough of Belmar (NJ) to negative in the aftermath of Hurricane Sandy. Moody's affirms the Aa3 rating on roughly $9.4 million of outstanding general obligation debt, secured by the borough's unlimited property tax pledge.

SUMMARY RATINGS RATIONALE

The Aa3 rating reflects stable, adequate reserves, conservative budgeting, a moderately sized tax base with solid wealth levels, and a manageable debt burden.

The negative outlook reflects the risks the borough faces in the aftermath of Hurricane Sandy, including potential reduction to assessed value, the increase in debt burden from an expected bond sale to pay for boardwalk reconstruction and other clean-up costs, and the susceptibility of the budget to sensitive tourism-related revenues.

STRENGTHS

-- Solid wealth levels

-- Stable financial profile

CHALLENGES

-Declining fund balance

-Some reliance on seasonal revenues

-Roll-over risk posed by short-term notes

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 $14 million of damage including a destroyed boardwalk and clean-up costs. The borough plans to fund these costs through a $20 million bond ordinance.

Although the debt service on this debt would be mostly reimbursable by the Federal Emergency Management Agency, the bonds would double the borough's debt burden. Belmar's gross debt was $12 million at the end of 2011.

Further, 18% of the borough's Current Fund budget derives from seasonal, visitor-related revenues, including marina slip rentals and boat fuel sales. Outside the Current Fund, the borough operates a separate beach utility funded almost exclusively by beach fees equal to about 22% of Current Fund revenues. The performance of these revenue sources going forward, and the borough's ability to adjust to a potential decline, will be an important factor during future rating reviews.

CONSISTENT OPERATIONS LEAD TO STABLE, THOUGH DECLINING, FUND BALANCE

The borough's financial position has been in moderate decline for a decade, with draw-downs of reserves in eight of the past 10 years. Each year, the borough typically appropriates at least 80% of its Current Fund balance, and then replenishes most or all of it through budgetary surpluses, particularly from excess revenues.

We believe management feels comfortable at a lower fund balance level, and the usage of reserves in recent years has been largely planned. In 2011, based on unaudited estimates, the borough appropriated $1.3 million of its fund balance, and only replenished $1.14 million of it, leading to a reserve decline of $158,000. The borough's fund balance of $1.4 million(10.8% of revenues) is still consistent with state peers, and we expect management to continue running stable operations.

Some of the borough's revenue are somewhat volatile as sources are derived from its beach and marina operations on the New Jersey shore: sales of boat fuel (9% of budgeted revenues in 2012), marina rentals (8%), and rentals for concession stands on the water (1%). Further, the borough runs a separate utility fund for beach operations, funded mainly by fees charged to the public to access the beach. Management copes with the unpredictability of these revenues through very conservative budgeting, especially for the beach fees. We believe management has shown the ability to maintain consistent financial operations despite occasional volatility in some of these revenues.

SEASONAL COMMUNITY WITH STRONG TAX BASE BOLSTERED BY SOLID WEALTH

The borough's $1.66 billion tax base is strong. Although the median family income of year-round residents is slightly below the national median, the borough's tax base is supported by tourism in the summer, a large number of beach homes, and some commercial presence ancillary to the beach activities, such as motels and retail properties. As a result, most measures of tax base strength are well above the median, including full value per capita of $287,109 (state median: $150,444) and a median home value of $186,700 as of 2000 (156% of the state median).

Full value is under some pressure, falling 6.5% in between 2009 and 2012. The borough's ability to rebuild after Hurricane Sandy and stabilize its tax base will be crucial relative to its rating going forward.

DEBT BURDEN EXPECTED TO REMAIN MANAGEABLE

The borough's debt burden of 0.6% of full value is both manageable and consistent with the state median. Debt service is equal to a reasonable 7.1% of Current Fund expenditures, although a significant portion of the borough's debt is accounted for in a separate utility fund and is considered self-supporting.

The borough's three-year capital plan includes $5.75 million of projects, implying the possibility of an increase in debt burden should these projects be debt-financed. The impending increase in debt burden could be short-lived as it would be repaid with FEMA reimbursements. However, assuming such reimbursements are forthcoming, we expect any other increase in the debt burden to be moderate, as the borough's long-term debt is currently amortizing at a very rapid rate, with 74% of principal scheduled to be repaid in the next 10 years.

More than half the borough's debt is in the form of short-term notes, the majority of which the borough has rolled over annually. Although the market for such notes is currently strong, we believe reliance on access to the market is a potential risk that could present downward pressure on the borough's credit quality should investor interest in these notes wane.

Outlook

The negative outlook reflects the risks the borough faces over the next one to three years, including probably reductions to assessed value, the increase in debt burden from an approved bond ordinance, and the performance of seasonal, tourism-related revenues.

WHAT COULD MAKE THE RATING GO UP

- Sustained build-up in reserves

-Strengthening of tax base

WHAT COULD MAKE THE RATING GO DOWN

-Depletion of reserves

-Structural imbalance to budget

-Failed market access for short-term debt

KEY STATISTICS:

2010 Population: 5,794 (4.2% decrease since 2000 census)

2011 Full value: $1.66 billion

2011 Full value per capita: $287,109

1999 Per capita income: $29,456 (109.1% of the state and 136.5% of the US medians)

1999 Median family income: $61,250 (93.7% of the state and 122.4% of the US medians)

Direct debt burden: 0.6%

Overall debt burden: 1%

Payout of principal (10 years): 74.4%

2010 Current Fund balance: $1.59 million (11.88% of Current Fund revenues)

2011 Current Fund balance (unaudited): $1.43 million (10.77% of Current Fund revenues)

Post-sale parity debt outstanding: $9.4 million

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.

Please see the credit ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

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.

Analysts

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

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

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

Contacts

Journalists: (212) 553-0376
Research Clients: (212) 553-1653


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USA

Moody's revises the outlook on the Borough of Belmar (NJ) to negative in the aftermath of Hurricane Sandy
No Related Data.

 

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