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New Issue:

MOODY'S ASSIGNS A1 RATING TO MICHIGAN'S PLANNED $121 MILLION CADILLAC PLACE LEASE BONDS, TO BE ISSUED THROUGH THE MICHIGAN STRATEGIC FUND

03 Jun 2011

STATE'S STABLE OUTLOOK APPLIES

Michigan (State of)
State
MI

Moody's Rating

ISSUE

RATING

Limited Obligation Revenue Bonds (State of Michigan Cadillac Place Office Building Project) Series 2011A

A1

  Sale Amount

$120,685,000

  Expected Sale Date

06/14/11

  Rating Description

Lease Rental

 

Limited Obligation Revenue Bonds (State of Michigan Cadillac Place Office Building Project) Series 2011B (Federally Taxable)

A1

  Sale Amount

$755,000

  Expected Sale Date

06/14/11

  Rating Description

Lease Rental

 

Opinion

NEW YORK, Jun 3, 2011 -- Moody's Investors Service has assigned a rating of A1 and a stable outlook to the State of Michigan's Limited Obligation Revenue Bonds being issued in two series by the Michigan Strategic Fund to refund debt previously issued to acquire and improve Detroit's Cadillac Place office building.

RATING RATIONALE

The rating is based on the credit standing of the state, which has a general obligation debt rating of Aa2 and a stable outlook. The rating assigned to these securities is two notches below the state's general obligation rating because of the need for annual appropriation of funds for lease payments, and because of certain provisions in the underlying lease agreement that could allow for abatement or cancellation of the lease, as discussed further below.

Strengths:

- Essential nature of financed building (state governmental offices)

- Support from highly rated parent

Challenges:

- Payments subject to annual appropriation

- Underlying lease that allows is abatement or cancellation under some circumstances

DETAILED CREDIT DISCUSSION

CURRENT ISSUES REFUND 2004 CERTIFICATES ISSUED TO FINANCE STATE'S CADILLAC PLACE PROJECT

Proceeds of the current issue will refund 2004 Certificates of Participation issued to finance the state's acquisition and expansion of the Cadillac Place office building in Detroit. The new bonds have a final maturity in October 2032, the same as the debt being refunded. Cadillac Place has more than 1.3 million gross square feet of space. It was built in the early 1920s to serve as the headquarters of General Motors, which moved out in 2000. The refunding will transfer ownership to the Michigan Strategic Fund from New Center Development Inc., an ad hoc entity formed in 1999 to take the property over from GM. The shift will allow the state to assume management or negotiate a new management agreement. The state uses Cadillac to house a broad range of its Detroit operations, including many state agencies, an appellate court, and state Supreme Court offices. The fact that the leased building plays an essential role in the functioning of Michigan's government substantially enhances bondholder security. The building currently houses about 1,600 state workers, representing an approximately 20% vacancy rate. The state is considering plans to move more employees into the building.

MICHIGAN STRATEGIC FUND SERVES AS CONDUIT ISSUER

The bonds are being issued by the Michigan Strategic Fund, which the state created in 1984 to provide

financing for development of agriculture, forestry, business, industry and communities in the state. The fund's governing statute permits it to issue debt with escalating lease payments, whereas the State Building Authority, the primary conduit for state lease borrowings, is generally limited to level lease payment. The fund is housed within the Michigan Department of Treasury and overseen by a nine-member board of directors including three state officials and six others appointed by the governor. The state officials, who serve on an ex-officio basis, are the state treasurer, the president of the Michigan Economic Development Corporation, and the Director of the Department of Labor and Economic Growth. The bulk of its issuances have been for industrial development, pollution control, solid waste, and non-profit projects. The current transaction represents the fund's second issuance of bonds backed by state lease payments. As a conduit entity, the fund's payment obligation is limited to revenues pledged under individual agreements with third-party obligors.

LEASE PAYMENT OBLIGATION IS SUBJECT TO ANNUAL LEGISLATIVE APPROPRIATION OF FUNDS

A lease between the Michigan Strategic Fund and the state will provide for payments from the state's Department of Technology, Management and Budget. The state's obligation under the lease is to make rental payments monthly for the term of the lease, subject to annual legislative appropriation of funds for that purpose. The length of the lease will be equal to the maturity of the bonds, and the annual lease payments will equal the debt service requirements. The lease requires the state to provide property and casualty insurance as well as rental interruption coverage. Property insurance for the building must equal full replacement value. The rental interruption policy's coverage, according to the lease agreement, must be maintained at 1.5 times the coming fiscal year's rent. Under the indenture, the fund can redeem the bonds up to the extent allowed by available insurance proceeds, in the event that the facilities are damaged and become unusable.

SOME PROVISIONS ALLOWING CANCELLATION ARE UNUSUAL

The lease will be canceled if the legislature fails to appropriate funds for payment or prohibits use of funds for payment of the lease. The lease is subject to abatement if the building in part or whole becomes unusable. The agreement also contains some non-standard provisions allowing the state to terminate the lease in response to violations by the Michigan Strategic Fund (or any of its subcontractors, suppliers or manufacturers) of several laws - the state Employers Engaging in Unfair Labor Practices Act, the Persons with Disabilities Civil Rights Act, and the Elliott-Larsen Civil Rights Act. Lease termination for any of these events is highly unlikely, in Moody's view, and similar provisions have been included in other transactions backed by commercial lease agreements, such as the state's 2000 certificates of participation for an office building, which are also rated A1. These non-standard provisions allowing for cancellation as well as those that allow for abatement weaken the payment obligation.

FACILITY'S ROLE IN STATE GOVERNMENT ENHANCES SECURITY

Debt-service payment dates are scheduled for April 15 and October 15. The October principal and interest payment comes shortly after the October 1 start of the state's fiscal year, which would expose bondholders to the risk of non-appropriation caused by late budget adoption. The payment mechanics provided for by the lease, however, negate this risk. Rental payments are to be made in monthly installments such that the October 15 principal and interest debt-service payment will be set aside by the preceding September 1.

Outlook

The state's outlook is stable, supported by strong management practices, such as mid-year spending adjustments. Future rating decisions are likely to reflect how the state manages its economic challenges, and whether it returns to structural balance as federal supports are removed.

What could change the rating - UP:

-Steady trend of rebuilding financial reserves

-Demonstration of lasting structural balance

-Economic performance in line with nation based on job growth and other measures

What could change the rating - DOWN:

-Renewed reliance on deficit financing or other non-recurring measures to achieve budget balance

-Indications of significantly reduced liquidity

-Deterioration in economic forecast versus current assumptions

-Assumption of burdensome financial commitments in support of local governments

The principal methodology used in this rating was The Fundamentals of Credit Analysis for Lease-Backed Municipal Obligations published in October 2004.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, public information, confidential and proprietary Moody's Investors Service information, and confidential and proprietary Moody's Analytics information.

Moody's Investors Service considers the quality of information available on the credit satisfactory for the purposes of assigning a credit rating.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

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

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service 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 the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Analysts

Edward Hampton
Analyst
Public Finance Group
Moody's Investors Service

Marcia Van Wagner
Backup Analyst
Public Finance Group
Moody's Investors Service

Contacts

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


Moody's Investors Service
250 Greenwich Street
New York, NY 10007
USA

MOODY'S ASSIGNS A1 RATING TO MICHIGAN'S PLANNED $121 MILLION CADILLAC PLACE LEASE BONDS, TO BE ISSUED THROUGH THE MICHIGAN STRATEGIC FUND
No Related Data.
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