New York, October 25, 2016 -- Issue: Lease Revenue Refunding Bonds, Series 2016B; Rating: A1; Rating Type: Underlying LT; Sale Amount: $2,515,000; Expected Sale Date: 10/27/2016; Rating Description: Lease Rental: Appropriation
Summary Rating Rationale
Moody's Investors Service has assigned a rating of A1 to the Oklahoma Development Finance Authority's Lease Revenue Refunding Bonds, Series 2016B (Pittsburg County Health Department Project). The A1 rating is two notches below that of the State of Oklahoma (Aa2, negative). The bonds are payable from lease rental payments from the Pittsburg County Health Department (PCHD) to the Oklahoma Development Finance Authority and assigned to the trustee. A constitutionally based guarantee applicable to these bonds, through the Credit Enhancement Reserve Fund (or CERF), insures debt service by pledging to issue general obligation bonds to refund the debt in the event that PCHD fails to make a monthly payment.
The negative outlook reflects the ongoing fiscal effects of a severe two-year decline in production and employment levels in the state's oil and gas sector and our expectations of a prolonged, muted recovery in oil prices and continued declines in production and ongoing sector volatility. We expect Oklahoma's financial reserves to continue to decline into fiscal 2018, as the state seeks to offset lower revenue and maintain adequate levels of spending. Contraction in the energy resources sector will continue to pressure employment levels.
Factors that Could Lead to an Upgrade
Rapid recovery in the oil and gas sector leading to sustained economic and revenue outperformance
Increase in financial reserves
Significant economic diversification beyond the oil and gas sector
Factors that Could Lead to a Downgrade
Exhaustion of CERF's claims reserve account
Depletion of state's financial reserves
Continued use of one-time revenues to address future budget gaps
Steeper-than-expected decline in energy production
The ODFA has guaranteed payment on the Series 2016B bonds under the state's constitutionally authorized Credit Enhancement Reserve Fund (CERF) program. The ODFA acts as insurer against nonpayment with the trustee as beneficiary. The guaranty policy stipulates that in the event of nonpayment of debt service, the ODFA irrecovably guarantees payment of principal and accrued interest on the Series 2016B bonds. In practice, the state expects to have sufficient advance warning of nonpayment given that Pittsburg County's fiscal year ends in June, debt service payments are scheduled for March 1 and September 1, and the Pittsburg County Health Department receives a 2.5 mill property tax levy in December that is authorized by the state constitution for county health departments.
As specified by the transaction documents, in the event of nonpayment and subsequent notification by the bond trustee, the ODFA would first draw on the Claims Reserve Account of the CERF program, which currently contains $1.2 million and consists of premiums paid by other borrowers under the program. If the reserve is insufficient to cure the nonpayment, the ODFA would then issue previously authorized state general obligation bonds. Voters in 1988 created the CERF program by passing a constitutional amendment that authorized the issuance of $100 million of general obligation bonds to finance its guarantees. Currently, there are $32 million of bonds outstanding that were issued under the program, and several million more are contemplated in the coming weeks. The state expects there to be a 91-day claims period between trustee notification and general obligation bond issuance, which incorporates a review by the state's attorney general and a 30-day incontestability waiting period after notification by the trustee.Bonds that benefit from the additional enhancement are not themselves general obligation bonds. They carry additional risks, such as the risk that a market will not exist for the state's general obligation bonds when the guarantee is triggered. The CERF bonds are also distinct from general obligation bonds in that a 30-day incontestability waiting period must elapse between the state attorney general's issuance of a certificate that the forms and procedures for bond issuance have been followed and the actual bond issuance. It is clear that the voter intent and constitutional language call for issuance of general obligation bonds in the event of nonpayment. The process has never been tested since all monthly payments have been made on time and in full in the program's history, as per the state.
The mechanics of the guarantee are such that an event of non-payment of the monthly lease rent must occur before the ODFA is notified. Bondholders are exposed to the risk in the 91-day window between non-payment and GO bond issuance that the CERF reserve will have been depleted by other program participants. Neither the state nor the authority are under legal obligation to make a payment out of available funds, other than the CERF reserve and GO bond proceeds, but are not prohibited from doing so.
The Series 2016B bonds are secured by rental payments made by the Pittsburg County Health Department to the ODFA. The department's obligation to make payments under a facilities lease and operation agreement with the authority is subject to the availability of funds through appropriation by Pittsburg County. Lease payments are payable from, but not legally secured by a pledge of, a constitutionally approved ad valorem property tax that the department receives from the county in December to make its March and September bond payments.
The lease agreement provides that the department's obligation to make payments from appropriated funds will be absolute and unconditional. The department covenants to make monthly payments first out of any revenues available to it. The agreement requires the department to make annual requests for appropriations sufficient to cover the bonds' debt service and to pay lease rentals on a monthly basis to the bond trustee. There is no debt-service reserve associated with the issue. Risk of default from late budget adoption is mitigated by the requirement that lease payments be made monthly, to provide in advance for upcoming bond interest and principal requirements.
Use of Proceeds
The Series 2016B bonds will refinance outstanding Series 2006A bonds, which were issued to finance a 31,000 square-foot health department facility in Pittsburg County, Oklahoma.
Oklahoma is the 28th-largest state, with a population of 3.9 million. It had annual gross domestic product of $169 billion as of the first quarter of 2016, which ranks 29th in the US.
The principal methodology used in this rating was Lease, Appropriation, Moral Obligation and Comparable Debt of US State and Local Governments published in July 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
For ratings issued on a program, series or category/class of debt, this announcement provides certain 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 certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain 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.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Moody's Investors Service, Inc.
7 World Trade Center
250 Greenwich Street
New York 10007
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007