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Rating Update:

MOODY'S DOWNGRADES RATING TO Aa2 FROM Aaa ON QLD-WACC, LLC'S WHOLE LOAN TO FINANCE THE NATIONAL PARK SERVICE'S WESTERN ARCHEOLOGICAL AND CONSERVATION CENTER IN ARIZONA

05 May 2011

$17.5 MM OF DEBT AFFECTED; OUTLOOK IS STABLE

General Services Administration
State
AZ

Opinion

NEW YORK, May 5, 2011 -- Moody's Investors Service has downgraded the rating to Aa2 from Aaa on the Whole Loan issued by QLD-WACC, LLC, Arizona, to finance the Western Archeological and Conservation Center. Ultimate security is derived from a lease between the United States of America, acting by and through the National Park Service ("NPS"), and the QLD-WACC, LLC, a special purpose entity created to finance this project. Proceeds of the loan financed construction of the Western Archeological and Conservation Center ("WACC") for NPS, acting on behalf of the U.S. Department of Interior. The WACC consists of approximately 50,000 square feet of office space, laboratory facilities, a library, and storage space. The loan was privately placed with Newman Financial Services, Inc. acting as the lender for the transaction, and is now held by Farm Bureau Bank.

SUMMARY RATING RATIONALE

The rating derives its strength from the credit of the United States as the tenant and primary obligor of the lease and reflects the unconditional obligation of the U.S.(via NPS) to make lease payments with virtually no provisions for termination, sufficient bankruptcy protection, and a financing structure which ensures both timely payments to the lender and adequate legal protections plus the additional security of a mortgage on the facility. However, lease payments can be reduced in some circumstances if the owner and manager of the facility fails to perform certain maintenance obligations, which could impact debt service paid to bond holders. Moody's has re-evaluated these lease provisions and concluded that the risk, though small, was not consistent with a Aaa rating or existing rating notching conventions.

STRENGTHS

-Unconditional obligation of the U.S.(via NPS) to make lease payments

-Mortgage on facility for the benefit of the lender

-Strong lease terms with lease payments not subject to any appropriation, termination rights or force majeure

-Rate covenant of 1.01x net revenues

-Negative covenants that protect the enterprise from other liens and dissolution

-Insurance policies which protect against interruption in lease payments

CHALLENGES

-Ability of the NPS to make small adjustments to rental payments if the LLC fails to perform maintenance under the terms of the lease beyond extent of monies available in maintenance reserve fund

DETAILED CREDIT ANALYSIS

LEASE RENTALS ARE CONTRACTUAL OBLIGATION OF U.S. GOVERNMENT, NOT SUBJECT TO APPROPRIATION

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 QLD-WACC, LLC, as lessor, and the United States, as tenant, dated July 13, 2001. This limited liability company was established for the sole purposes of constructing the project and subleasing the project to the National Parks Service. The LLC has irrevocably assigned all rights to lease rental payments to Farm Bureau Bank, as servicer (and lender) for repayment of the loan. Moody's has received an opinion from the U.S. Department of Interior's division of general law stating that the obligation to pay rent under the lease is an absolute and unconditional general obligation of the United States of America. The opinion also states that such obligation is not subject to future appropriation of funds by the U.S. Congress.

NPS CAN DEDUCT LIMITED MAINTENANCE COSTS IF LLC FAILS TO PERFORM

The loan is structured such that lease rental payments are sufficient to make base annual rent to cover debt service and annual operating costs to pay for maintenance and repair of the facility. Base rent payments are fixed, and began April 1, 2003, payable per month in arrears. Annual lease payments were $1.99 million in 2003, increased to $2.17 million beginning 2008, will step up to $2.33 million beginning 2013, and will step up again to $2.5 million beginning 2018 and ending 2022. Rent payments for operations are subject to annual adjustments for inflation. The loan repayment structure provides 1.01x coverage of debt service by revenues, net of operating and maintenance costs, leaving approximately $20,000 per year in excess coverage. This excess amount will be used to replenish a deficiency in the operating and management reserve, if any.

The LLC is responsible for maintenance and repair of the facility, and the federal government pays utilities and taxes. The LLC has maintained the facilities under the lease to date. If the LLC fails to do so, the government can perform the maintenance and deduct those costs from the rent due under the lease up to $3.15 per square foot per year. If the cost to the government exceeds this maximum amount, the government can carry over the deduction to the following year. Given the approximately 50,247 square feet of the facility, that suggests a maximum deduction of $158,278, or just under one month of rent ($166,443) and in excess of the $100,000 reserve fund.

LENDERS PROTECTED IN CASE OF CATASTROPHE

There are no termination rights during the term of the lease. However, if the entire building is destroyed by fire or other casualty, the lease will immediately terminate. The LLC has purchased an all-risk insurance policy that will cover up to the greater amount of the building replacement cost or the loan outstanding at the time of such an event. If the building is partially destroyed by fire or other casualty, the government shall continue to occupy the tenantable portion of the building, and upon substantial completion of the repairs, the government shall resume occupancy of the building. The LLC has also purchased rental interruption insurance in an amount sufficient to cover the lease payments for up to 24 months, a standard length of coverage for a project of this type.

BANKRUPTCY EXPOSURE VIEWED AS REMOTE

This financing structure is based upon the involvement of a private entity, QLD-WACC, LLC, as the lessor, which raises the risk of bankruptcy of or against the lessor or the LLC members, Chad L. Williams, LLC (which has 99% membership interest in the QLD-WACC, LLC) and QLD Funding, LLC (which has a 1% membership). Bankruptcy of the lessor could cause a temporary or permanent interruption of payment to the lessor and bondholders. However, risk of this outcome is low according to loan agreement covenants that prevent its liquidation and dissolution. An opinion provided by the borrower's counsel to the transaction argues that a court would not order the substantive consolidation of the members' assets in the event of a bankruptcy, but rather that it would recognize the separate existence in this transaction. The rating relies upon the strength of the bankruptcy protections provided.

Outlook

The outlook is stable. Moody's expects the LLC to continue to maintain the facility under the provisions of the lease and that the NPS will continue to make lease payments.

What Could Change the Rating - UP

-Additional reserves to offset the maximum amount of maintenance deductions allowed

What Could Change the Rating - DOWN

-Material deterioration in the credit strength of the US

-Significant increase in operating or maintenance costs that endangers the enterprise

LAST RATING ACTION

The last rating action with respect to QLD-WACC, LLC was on December 3, 2010, when the rating was affirmed.

PRINCIPAL RATING METHODOLOGY

The principal methodology used in this rating was The Fundamentals of Credit Analysis for Lease-Backed Municipal Obligations 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 Moody's website.

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

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 DOWNGRADES RATING TO Aa2 FROM Aaa ON QLD-WACC, LLC'S WHOLE LOAN TO FINANCE THE NATIONAL PARK SERVICE'S WESTERN ARCHEOLOGICAL AND CONSERVATION CENTER IN ARIZONA
No Related Data.
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