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Rating Update:

MOODY'S DOWNGRADES TO Aa2 FROM Aa1 THE TAXABLE INDUSTRIAL REVENUE BONDS (EPA LAB PROJECT) ISSUED BY WYANDOTTE COUNTY/KANSAS CITY

21 Jul 2011

RATING ON REVIEW FOR POSSIBLE DOWNGRADE IN CONJUNCTION WITH U.S. RATING ACTION

General Services Administration
State
KS

Opinion

NEW YORK, Jul 21, 2011 -- Moody's Investors Service has downgraded to Aa2 from Aa1 the rating on the Taxable Industrial Revenue Bonds (EPA Laboratory Project) issued by the Unified Government of Wyandotte County/Kansas City, Kansas ("Unified Government"). The bonds were issued to finance the construction and equipping of a U.S. Environmental Protection Agency (EPA) laboratory.

The rating is also on review for possible downgrade in conjunction with the recent watchlist action on the United States of America's rating. On July 13, 2011, Moody's placed the U.S. government's Aaa rating on review for downgrade, and published a Special Comment, "Implications of a U.S. Rating Action on Aaa-Rated Municipal Credits." The report is available at www.moodys.com. The ratings on all federal lease programs that are solely supported by payments from the federal government will move in lockstep with any rating action taken on the U.S.

RATING RATIONALE

The Aa2 rating is based on the strength of the obligation of the General Services Administration, a federal agency, to make lease rental payments, and is therefore derived from the United States of America's Aaa credit rating. Lease rental payments are an absolute and unconditional obligation of the United States of America, not subject to annual appropriation by the federal government, since the General Services Administration ("GSA") was authorized to enter into this lease for its full twenty-year term without further legislative action. Although there is no appropriation risk, they are rated two notches off of the USA rating to reflect the presence of abatement risk and the potential payment set-off risk if the lessor does not fulfill certain property maintenance requirements. In addition, there is minimal bankruptcy risk introduced by the involvement of a private entity, which is subject to bankruptcy.

The downgrade to Aa2 is driven by a reevaluation of lease provisions in comparison with other, similarly structured federal lease programs. The presence of abatement risk and termination risk that is not offset by any GSA make-whole provisions distinguish this program from other, higher-rated programs.

STRENGTHS

- Aaa rating of the U.S.A, from which the rating is notched

- Insurance policies which protect against interruption in lease payments

- Unconditional obligation of the US (via GSA) to make lease payments, not subject to appropriation

CHALLENGES

-Presence of abatement risk which allows the U.S. government to reduce rental payments if the property is damaged or unavailable. This is partially mitigated by the rental interruption insurance and property insurance.

-Presence of modest termination risk which allows the GSA to terminate the lease if property is destroyed. The likelihood of a finding a replacement tenant is low due to the single-use purpose of this facility as a laboratory. This is partially mitigated by the property insurance.

-Presence of payment set-off risk that allows the GSA to deduct maintenance costs from its rental payment if the lessor LLC does not maintain the property. This is partially mitigated by the presence of an operating fund reserve.

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

The bonds are full faith and credit obligations of GSA, payable from rentals, according to the lease between the Unified Government, as issuer, and Kansas EPA Laboratory, LLC, as the tenant. The lease has subsequently been assigned to CLF EPA Kansas City LLC, an entity created by CAP Lease, a REIT specializing in single-purpose leased properties. Lease rental payments are not subject to annual appropriation by the federal government, since the GSA has standing authority to enter into this lease for the full twenty-year term without further legislative action. The bonds are not an obligation of the Unified Government or the State of Kansas.

RENTAL PAYMENTS COVER DEBT SERVICE AND MAINTENANCE BUT ARE SUBJECT TO ABATEMENT, OFF-SET

Lease rental payments are structured to provide "base rent" to cover debt service and "additional rent" to pay for maintenance and repair of the facility. Base rent payments are fixed, and additional rent payments are subject to annual adjustments for inflation, as set out in the lease between the GSA and the LLC. In the event that the lease payments are insufficient to cover debt service and operating costs, the LLC is required to make any necessary additional payments.

Rental payments are subject to abatement, since GSA may suspend its obligation to pay sublease rentals for any period the project is damaged or destroyed by fire or other catastrophic event that renders the facility unusable. To mitigate this abatement risk, the tenant is required to purchase rental interruption insurance in an amount sufficient to cover the maximum amount of sublease payments abated for an unlimited period of indemnity. All required insurance is currently in place.

The tenant is responsible for maintenance and repair of the facility, and GSA pays utilities and taxes. If the tenant fails to maintain the facility according to the lease, the GSA can perform the maintenance and deduct those costs from the rent due under the sublease. This set-off against rent could adversely affect the amount of rent available to make debt service, but is mitigated by the presence of an operating reserve fund equal to $100,000. To date, no use of the operating reserve has been necessary.

BANKRUPTCY EXPOSURE VIEWED AS REMOTE

This financing structure is based upon the involvement of a private entity, CLF EPA Member LLC, as the tenant, which raises the risk of bankruptcy affecting payments to bondholders. CLF EPA Member LLC has the sole purpose of owning, leasing and managing the EPA laboratory and its sole member is Caplease, LP. Caplease is jointly owned by Capital Lease Funding, Inc., and CLF OP General Partner LLC. Bankruptcy of one of these entities could cause a temporary or permanent interruption of payment to the lessor and bondholders. However, risk of this outcome is low according to the opinion provided by CLF Member LLC's counsel to the transaction. The opinion argued that a court would not order the substantive consolidation of the limited partnership and the other entities in the event of a bankruptcy, but rather that it would recognize the separate existence of CLF EPA Member LLC in this transaction. The rating relies upon the strength of the bankruptcy opinion provided.

GSA SERVES AS PRIMARY BUSINESS AGENT FOR U.S. GOVERNMENT

GSA acts as a business agent for the United States 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. GSA also has statutory authority to enter into a long-term capital lease without specific legislative authorization if annual lease rental payments do not exceed a present value cap determined by Congress.

Outlook

The outlook for the Unified Government of Wyandotte County/Kansas City, Kansas Taxable Industrial Revenue Bonds (EPA Laboratory Project) is stable. The outlook reflects the expectation of full and timely debt service payments, based on the strength of the General Services Administration's obligation to make lease rental payments to cover debt service.

What could change the rating UP?

-Modifications that strengthen the legal structure, such as elimination of abatement risk

What could change the rating DOWN?

-Change in rating of the U.S.

- Failure of the tenant to maintain the facility to an extent that it cannot be occupied

- Violation of lease terms by the tenant

The principal methodology used in this rating was The Fundamentals of Credit Analysis for Lease-Backed Municipal Obligations published in October 2004. Please see the Credit Policy page on www.moodys.com for a copy of this methodology .

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Information sources used to prepare the rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, and confidential and proprietary Moody's Analytics information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a 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

Baye B. Larsen
Analyst
Public Finance Group
Moody's Investors Service

Lisa Heller
Backup Analyst
Public Finance Group
Moody's Investors Service

Contacts

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Research Clients: (212) 553-1653


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MOODY'S DOWNGRADES TO Aa2 FROM Aa1 THE TAXABLE INDUSTRIAL REVENUE BONDS (EPA LAB PROJECT) ISSUED BY WYANDOTTE COUNTY/KANSAS CITY
No Related Data.
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