RATING ON REVIEW FOR POSSIBLE DOWNGRADE IN CONJUNCTION WITH U.S. RATING ACTION
General Services Administration
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)
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.
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
- 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
-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
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,
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
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.
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
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
- 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
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relation to the provisional rating assigned, and in relation to a
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Baye B. Larsen
Public Finance Group
Moody's Investors Service
Public Finance Group
Moody's Investors Service
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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
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