$19.45 MILLION OF DEBT AFFECTED
U.S.A. - General Services Administration
NEW YORK, Apr 29, 2011 -- Moody's Investors Service has downgraded to Aa1 from Aaa the rating on the City
of Miami's (FL) 8.65% Rental Revenue Bonds, Series 1988. The bonds were
initially issued for the purpose of site acquisition and construction of a
facility to house the Miami offices of the United States Attorney General. The
bonds are backed by lease payments from the United States government, via the
General Services Administration (GSA). The rating outlook is stable.
The rating downgrade is based on re-evaluation of lease provisions that allow
the lease to be reassigned and renegotiated and leave the pledged revenues
assigned to the issuer, for whom the bonds are a limited obligation. These
weaknesses are somewhat mitigated by agreements among the parties to the
transaction that direct payments from the GSA to the trustee and ensure that
debt service is funded six months in advance of payment dates. The government is
obligated under the terms of the lease to make rental payments equivalent to
debt service without abatement or set-off.
-Unconditional obligation of the US (via GSA) to make lease payments, not
subject to appropriation
-Obligation not subject to set-off or abatement even in the case of partial or
complete destruction of the property
-The US agrees to make rental payments to cover debt service even if the lease
is terminated or renegotiated
-The GSA may reassign the lease to another party with the consent of the City of
Miami, leading to some degree of uncertainty related to potential renegotiation
of the lease terms
-The City of Miami has not assigned its interest in the lease payments to the
trustee, leaving the payments at risk in the remote event that the City files
DETAILED CREDIT DISCUSSION
LEASE RENTALS ARE CONTRACTUAL OBLIGATION OF U.S. GOVERNMENT, NOT SUBJECT TO
The lease is a full faith and credit obligation of the United States, and the
loan is payable from rentals according to a lease entered into between the City
of Miami as lessor, and the United States, as tenant, dated October 22, 1987.
The rating is based on the credit of the United States as the tenant and obligor
of the lease.
An opinion from the U.S. General Services Administration (GSA) states that the
obligation to pay rent under the lease is an absolute and unconditional general
obligation of the United States of America. Since the funds were authorized from
the Federal Building Fund, there is no risk of Congress failing to appropriate
the funds necessary to make the lease payments. The Fund was established
pursuant to the Federal Property and Administrative Services Act of 1949 as a
revolving fund not requiring additional congressional authorization.
CITY OF MIAMI'S INTEREST IN LEASE PAYMENTS NOT ASSIGNED TO TRUSTEE
The City of Miami (rated A1) did not assign its interest in the lease payments
from the GSA to the trustee. While we view the likelihood of a bankruptcy filing
by Miami as remote, the lack of assignment of its interest introduces a risk to
bondholders. In the event of bankruptcy, the court could find that these
payments have no preference and cause payments to be redirected from the trustee
to the city or another party.
GSA COULD REASSIGN LEASE TO ANOTHER PARTY
The U.S. has the right to reassign the lease, which could result in
renegotiation of its terms. The lease could be reassigned to another party with
a greater bankruptcy risk than the City of Miami. However, this risk is somewhat
mitigated by an agreement in which the government has promised to pay rental
payments sufficient to cover debt service regardless of reassignment or
GSA MAKES DIRECT PAYMENTS TO TRUSTEE
While the interest of the city in the rental revenues has not been assigned to
the trustee, the original legal documents provided that GSA shall make direct
rental payments to the trustee and to ensure that debt service payments are
funded six months in advance. The GSA has made direct payments to the trustee
since the inception of the lease and there is little likelihood that this
payment pattern would be modified.
The lease is structured such that lease rental payments are sufficient to make
base annual rent to cover debt service. The government is responsible for
maintenance and repair of the facility and is also obligated to cover any
deficiencies in rental payments. Additional rent due to the City of Miami to
cover insurance or any other costs to the city pursuant to the lease is paid
into a separate account and is not part of the pledged revenues. The lease had
an initial term of 30 years, scheduled to terminate when the outstanding bonds
mature in 2019.
RENTAL PAYMENTS NOT SUBJECT TO ABATEMENT OR OFFSET
Neither default nor destruction of the property frees the government from its
payment obligations under the lease.
If the building is damaged or destroyed by fire or other casualty, the
government may elect to make repairs and continue to make rental
payments. Should the government determine that the building is a total loss, it
shall assume all outstanding indebtedness, at which point title to the property
would be conveyed from the City of Miami to the government.
In case of default by either the government or the city, the government shall
assume all outstanding debt and gain title to the property. The lease grants a
60-day cure period to the government for late payment of rent, for which the
government must compensate bondholders with additional interest. Because
semi-annual payments of principal and interest must be fully funded six months
in advance of scheduled payment dates to bondholders, late payments are unlikely
to affect the ability of the trustee to make full payments to bondholders when
due. In practice, the US has made all monthly rental payments when due.
GSA SERVES AS PRIMARY BUSINESS AGENT FOR U.S. GOVERNMENT
GSA functions as a business agent for the federal government, providing a range
of services to federal agencies including purchases, sales and services. GSA has
statutory authority to manage the construction, leasing and purchase of office
buildings, and oversees hundreds of owned and leased government buildings.
The stable outlook reflects the expectation of full and timely debt
service payments, based on the General Services Administration's record of lease
rental payments to cover debt service and a structure that, despite having a
60-day grace period for rental payments, requires rental payments to be made six
months in advance of debt service payment dates.
WHAT COULD MOVE THE RATING UP
--Assignment of the City of Miami's interest in the lease payments to the
--Strengthening of lease provisions to prevent reassignment of the lease
WHAT COULD MOVE THE RATING DOWN
--Downgrade of the U.S. government rating
--Bankruptcy of the City of Miami
The principal methodology used in this rating was Fundamentals of
Credit Analysis for Lease-Backed Municipal Obligations rating
methodology published in October 2004. Other methodologies and factors that may
have been considered in the process of rating this issuer can also be found on
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
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Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.
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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.
Marcia Van Wagner
Public Finance Group
Moody's Investors Service
Public Finance Group
Moody's Investors Service
Journalists: (212) 553-0376
Research Clients: (212) 553-1653
MOODY'S DOWNGRADES CITY OF MIAMI, FL 8.65% RENTAL REVENUE BONDS, SERIES 1988 TO Aa1 FROM Aaa ; OUTLOOK IS STABLE
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