$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