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Rating Update:

MOODY'S UPGRADES TO Aa3 FROM A1 THE TAXABLE LEASE REVENUE BONDS, SERIES 2010A (VOYAGEURS NATIONAL PARK FACILITY) ISSUED BY THE EDA OF INTERNATIONAL FALLS (MN)

20 Jul 2011

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

U.S.A. - General Services Administration
State
MN

Opinion

NEW YORK, Jul 20, 2011 -- Moody's has upgraded to Aa3 from A1 the $11.4 million Taxable Lease Revenue Bonds, Series 2010A (Voyageurs National Park Facility), issued by the Economic Development Authority of the City of International Falls (MN). The bonds were issued to finance an administrative headquarters complex in International Falls (MN) to be used by the National Parks Service for the management of the nearby Voyageurs National Park.

The rating is 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 Aa3 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, the bonds are rated three notches off of the USA rating to reflect the presence of abatement risk, termination risk, payment set-off risk if certain performance measures are not met, and the risk that a City of International Falls or the EDA's bankruptcy would affect the flow of funds available for debt service.

The upgrade is driven by the elimination of "acceptance risk" that was present during the construction phase of this project. If the GSA did not accept the final project, then the lease would terminate and no rental payments would be made. The GSA accepted and occupied the facility on March 3, 2011 and has been making full, timely rental payments directly to the trustee.

Credit Strengths:

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

- Lease payments are not subject to appropriation

- Insurance policies which protect against interruption in lease payments

- Indenture required reserves include a $500,000 DSRF and a $60,000 Operating Reserve

Credit 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. 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 does not maintain the property. This is partially mitigated by the presence of an operating fund reserve.

- City of International Falls (MN) or the city's EDA bankruptcy risk

BONDS ARE PAYABLE FROM U.S. GOVERNMENT LEASE RENTALS PAYMENTS, NOT SUBJECT TO APPROPRIATION

The bonds are obligations of Economic Development Authority of the City of International Falls, Minnesota (EDA), payable from rentals received under a lease entered into between the City of International Falls, as lessor and the United States of America (the government), as lessee. Under an assignment agreement and a supplemental lease addendum with the government, the City of International Falls assigned its rights and obligations as lessor under the lease to the EDA as lessor. The EDA is a governmental entity and is considered to be a component unit of the city. Per the lease, the property leased to government is to be used by such purposes as determined by the U.S. General Services Administration (GSA). The National Parks Service is the facility occupant.

Lease rental payments are not subject to annual appropriation by the federal government. GSA regional counsel has indicated that, subject to the terms of the lease, lease rental payments are a general obligation of the government backed by its full faith and credit. The bonds are structured such that lease rental payments are sufficient to cover debt service and pay for maintenance and repair of the facility.

The government's payments under the lease are due to the City of International Falls, Minnesota, though payable to the trustee under the assignment agreement and supplemental lease addendum. While there is no history of government units within the state of Minnesota filing for bankruptcy, municipal bankruptcy proceedings are permitted under state statutes. Because no opinion has been provided on the impact of a potential bankruptcy of the City of International Falls on the flow of funds for debt service, it is unknown how a bankruptcy proceeding would affect the debt service payments.

RENTAL PAYMENTS BEGAN MARCH 3 UPON FACILITY OCCUPANCY; RENTAL PAYMENTS SUBJECT TO ABATEMENT AND SET-OFF

The government's obligation to make lease rental payments was contingent on substantial completion of the project and acceptance of the facility. The government accepted and occupied the facility on March 3, 2011, significantly reducing the risk of non-payment. Rental payments are also subject to abatement if the facility is damaged or destroyed by fire or other catastrophic event that renders the facility unusable. In addition, lessor non-performance under various operational provisions under the lease could lead to abatement and even termination of the lease. Per the indenture, the project must be insured at full replacement value and rental interruption insurance must be maintained equal to 24 months of project revenues.

The EDA through the City of International Falls is responsible for meeting the operational provisions of the lease with regard to the facility. In addition to required insurance provisions, the city's experience with managing its own municipal facilities together with the importance of the national park to the city as a visitor destination provide some comfort that the city's management of the facilities will sufficiently meet the governments' standards under the lease.

CONSTRUCTION AND ACCEPTANCE RISK ELIMINATED WITH PROJECT COMPLETION AND OCCUPANCY

The construction schedule assumed completion of the project on or prior to March 1, 2011 and full occupancy was obtained on March 3. The slight decrease in rent for the two-day delay was deducted from the operating portion of rental payments. Capitalized interest funded debt service due on April 1, 2011. Additional security is provided by a debt service reserve fund funded with $500,000 of bond proceeds, equivalent to approximately 50% of annual debt service.

Outlook

The outlook for the bonds is stable. The outlook reflects the expectation of full and timely debt service payments, based on the strength of the United States of America'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 or bankruptcy risk

What could change the rating DOWN?

-Change in rating of the U.S.

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

- Violation of lease terms by the tenant

- Conditions leading to the exercise by the government of lease provisions that pose a risk to timely payment of debt service

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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MOODY'S UPGRADES TO Aa3 FROM A1 THE TAXABLE LEASE REVENUE BONDS, SERIES 2010A (VOYAGEURS NATIONAL PARK FACILITY) ISSUED BY THE EDA OF INTERNATIONAL FALLS (MN)
No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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