RATING ON REVIEW FOR POSSIBLE DOWNGRADE IN CONJUNCTION WITH U.S. RATING ACTION
U.S.A. - General Services Administration
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.
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.
- 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
- 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
- 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
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
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
CONSTRUCTION AND ACCEPTANCE RISK ELIMINATED WITH PROJECT COMPLETION
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
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
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
- 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.
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Baye B. Larsen
Public Finance Group
Moody's Investors Service
Public Finance Group
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