APPROXIMATELY $932 MILLION IN SIMILAR DEBT OUTSTANDING
Kentucky (Commonwealth of)
State
KY
Moody's Rating
ISSUE | RATING |
|---|
First Mortgage Refunding Revenue Bonds (Court Facilities Project), Series 2011 | Aa3 |
Sale Amount | $8,160,000 |
|---|
Expected Sale Date | 04/19/10 |
|---|
Rating Description | Lease Rental |
|---|
|
Opinion
NEW YORK, Apr 18, 2011 -- Moody's Investors Service has assigned a Aa3 rating with a negative outlook to
Nelson County Public Properties Corporation First Mortgage Refunding Revenue
Bonds (Court Facilities Project), Series 2011.
SUMMARY RATINGS RATIONALE
The rating is based on the credit quality of the Commonwealth of
Kentucky (issuer rating of Aa2, with a negative outlook), the
subject-to-appropriation nature of the payments supporting the bonds, and the
commonwealth's significant reliance on appropriation-backed financings to
fund capital investments. Proceeds of the Series 2011 bonds will be used to
refund for debt service savings debt issued to finance the construction of a
courthouse used by the commonwealth's Administrative Office of the Courts (AOC).
Kentucky retired the last of its outstanding general obligation bonds in 1995.
Kentucky issues debt indirectly by entering into lease/financing agreements with
various state agencies. The issuer rating represents the commonwealth's implicit
general obligation rating and reflects a record of financial control, including
close monitoring of revenues and proactive responses to lowered revenue
estimates. This strength is offset by low per-capita income levels,
above-average debt levels and low pension funded levels. In addition,
Kentucky's economy remains dependent on a weakened manufacturing sector,
although it has diversified in recent years.
Kentucky's negative outlook reflects significant fiscal stress related to the
economic downturn, a large and growing unfunded pension liability and a trend of
reliance on non-recurring budget balancing measures, including debt
restructuring for near-term savings and authorized issuance of debt to cover
teacher retiree health insurance costs. Despite pension reform measures over the
past few years, an approved employer contribution schedule of less than the
actuarially required amount projects growth in the liability for another 14-15
years. Pension funding levels are not expected to improve near term and the
economy remains vulnerable due to a heavy dependence on a weakened
manufacturing sector.
Further, the enacted budget for the fiscal 2011-2012 biennium relies on a number
of one-time measures, together with some expenditure cuts, and projected revenue
growth for balance. The ability of the commonwealth to meet expected expenditure
reduction, budget balance and revenue growth targets, without the need
for additional reliance non-recurring measures, will be a key near-term credit
consideration.
Credit strengths are:
-Commonwealth's reliance on appropriation-backed debt
- Signs of revenue stabilization
-History of active financial control
Credit challenges are:
-Revenue weakness amid a slowing economy, leading to significant fiscal stress
and reliance on non-recurring measures
-Dependence on weakened manufacturing sector, particularly auto manufacturing
-Low per-capita income
-Above-average debt ratios
-Weak pension system funding
-Trend of borrowing to satisfy current costs for teacher retiree health benefits
-History of late budget adoption, although recent budgets have been timely
DETAILED CREDIT ANALYSIS
PAYMENTS FOR DEBT SERVICE PROVIDED UNDER BIENNIALLY RENEWABLE LEASE
The bonds are payable solely from lease rental payments from the
commonwealth's Administrative Office of the Courts under a lease agreement with
the corporation. Per the lease, AOC is obligated to make rental payments,
including payment of a "Use Allowance" equal to debt service and an
"Operating Costs Allowance" payment to cover operating costs. AOC is
obligated to make semi-annual rental payments of the "Use Allowance"
directly to the trustee two business days prior to the debt service payment
due dates. The "Operating Costs Allowance" payment is made to the
county. Rental payments are made pursuant to the terms of the lease
agreement, which is automatically renewable for successive biennial periods
unless terminated in writing by AOC.
AOC covenants in the lease to seek sufficient legislative appropriations to make
rental payments for each biennial period. The General Assembly has no obligation
to make appropriations for rental payments, and AOC has no obligation to renew
the lease. The commonwealth is highly reliant on lease-appropriation financings
for capital projects and has no history of non-appropriation for these
financings. Under the Mortgage Deed of Trust, a mortgage lien on the project has
been granted to the trustee. In addition, the interests of the corporation in
the lease (excluding the Operating Costs Allowance) have been assigned to the
trustee. In the event of a default on the bonds, the trustee may sell or re-let
the facility to benefit bondholders.
The lease may be amended to reduce AOC's required rental payments. Any such
amendment, however, would be contingent on the county's assumption of the
reduced portion and confirmation by Moody's that the outstanding rating on the
bonds would not be withdrawn or downgraded as a result of the amendment.
LEASE PERMITS ABATEMENT, RENTAL CREDITS
Should the project be destroyed or damaged such that it is rendered unusable by
AOC, rental payments may be abated until AOC regains use of the project. As
protection against such an event, rental interruption insurance sufficient to
cover 24 months of debt service is required per the lease. In addition, the
lease provides for an assessment of whether or not the project could be
sufficiently renovated in 24 months. If the project cannot be sufficiently
repaired within 24 months, insurance proceeds will be used to discharge the
bonds. Per the lease, casualty insurance is provided at the greater of the
amount of bonds outstanding or the full insurable value of the project.
Certain rental credits are permitted if AOC incurs operating costs in performing
maintenance or other functions that are the obligation of the County under the
lease. These credits, however, may only be taken against the Operating Costs
Allowance, which AOC pays to the county for operating costs.
For additional information on the Commonwealth of Kentucky, please see Moody's
March 30, 2011 report.
Outlook
Kentucky's credit outlook is negative. The commonwealth's economic and financial
weakening has led to sizable budget deficits, which the commonwealth has dealt
with largely through the use of one-time resources, including a draw-down of
reserve balances and borrowing for budget relief. Kentucky faces ongoing budget
pressure over the biennium as it seeks to stabilize its finances. The
commonwealth's pension liability will also continue to grow in the near to
medium term. The commonwealth has a history of active financial management that
has enabled it to address fiscal instability. The commonwealth's
continuing ability to maintain fiscal stability by meeting planned
expenditure, revenue, and debt targets without additional reliance on
one-time resources is a key credit consideration. As the economic recovery takes
hold, it will be important for the commonwealth to wean itself of non-recurring
budgetary solutions and to rebuild reserves to maintain financial flexibility.
What could change the rating - UP:
-Sustained economic and revenue growth, with structural balance in state
finances and limited reliance on non-recurring resources
-Build-up and maintenance of reserves.
What could change the rating - DOWN:
-Continued economic slowing, even after a national upturn, resulting in weaker
revenue performance that strains commonwealth finances
-Depletion of reserves with no replenishment in step with other comparably rated
states
-Trend of ongoing reliance on non-recurring resources, particularly use of
additional deficit financing, to balance the commonwealth's budget
-Lack of a fiscal plan that will maintain budget balance when federal fiscal
stimulus funding is no longer available
-Trend of negative GAAP basis ending balances
-Indications of strained liquidity
-Failure to address declining pension system funded levels
-Failure of the commonwealth to pass a timely budget, leading to an extended
shutdown of state government, even if debt service continues to be paid
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
Lisa Heller
Analyst
Public Finance Group
Moody's Investors Service
Nicole Johnson
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 Aa3 RATING AND NEGATIVE OUTLOOK TO NELSON COUNTY PUBLIC PROPERTIES CORPORATION FIRST MORTGAGE REFUNDING REVENUE BONDS (COURT FACILITIES PROJECT), SERIES 2011
