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Rating Action:

Moody's Assigns Aa2 to $25M Guam Courthouse Federal Lease Rev. Bonds; outlook stable

27 Mar 2017

New York, March 27, 2017 -- Issue: Taxable Lease Revenue Bonds (U.S. District Court of Guam Project), Series 2017; Rating: Aa2; Rating Type: Underlying LT; Sale Amount: $24,970,000; Expected Sale Date: 04/04/2017; Rating Description: Lease: Appropriation;

Summary Rating Rationale

Moody's Investors Service has assigned a Aa2 rating to the $24.97 million Taxable Lease Revenue Bonds (US District Court of Guam Project), Series 2017 issued through the Public Finance Authority. The outlook is stable.

The rating is notched off the Aaa rating of the United States of America (US). The US, acting through its General Services Administration (GSA), has entered into a 20-year lease for the federal courthouse in Guam. Lease payments, owed to the lessor, a special purpose vehicle, are irrevocably assigned to bondholders. Notching reflects the lease structure and set-off risk.

Rating Outlook

The rating outlook is stable. The outlook reflects the rating outlook of the US and our expectations that lease payments will flow uninterrupted to the trustee on a monthly basis.

Factors that Could Lead to an Upgrade

Elimination of set-off risk

Factors that Could Lead to a Downgrade

Downgrade of the US

Interruption or delay in monthly lease payments

Non-performance of its obligations under the lease by the borrower

Economy

The rating is notched off the rating on the US. For information on this sector please see moodys.com.

Finances and Liquidity

The rating is notched off the rating on the US. For information on this sector please see moodys.com.

Liquidity

The rating is notched off the rating on the US. For information on this sector please see moodys.com.

Debt and Pensions

The rating is notched off the rating on the US. For information on this sector please see moodys.com.

Debt Structure

The rating is notched off the rating on the US. For information on this sector please see moodys.com.

Debt-related Derivatives

The rating is notched off the rating on the US. For information on this sector please see moodys.com.

Pensions and OPEB

The rating is notched off the rating on the US. For information on this sector please see moodys.com.

Governance

The rating is notched off the rating on the US. For information on this sector please see moodys.com.

Legal Security

BONDS ARE SECURED BY LEASE PAYMENTS MADE BY THE US FOR THE FEDERAL COURTHOUSE IN GUAM

The bonds are secured by lease payments to be made by the US, acting through the GSA, to MVP Federal Leasing, LLC (the borrower), for the federal courthouse building in Hagatna, Guam. The borrower has irrevocably assigned its rights to lease payments to the trustee.

Although an annual appropriation is required for the GSA to make outlays out of its Federal Buildings Fund, we note that the risk of non-appropriation is substantially mitigated. The federal government has the ability to authorize outlays via a continuing resolution in the absence of a budget. The transaction structure provides additional protection against disruption in the flow of lease payments. The trustee is required to set-aside aside monthly lease payments for debt service on a 1/6th and 1/12th basis, which is a strong protection given the relative infrequency and historically short duration of federal government shutdowns. Reserves with the trustee pledged to bondholders can also be used in the event of payment disruption. The operating reserve will be funded at three month's operating expense at issuance and adjusted for inflation annually. As with all other rated federal lease transactions, there is no debt service reserve fund.

SET-OFF RISK IS PRESENT, BUT TRANSACTION ELIMINATES TERMINATION RISK

The GSA may set-off rent if a final decision has been made asserting a claim against MVP Federal Leasing, LLC for non-performance of its obligations and covenants under the lease. As is the case with other GSA leases, violations of the Federal Procurement Policy Act may also result in set-offs. Mitigating factors to this risk include the 17-year relationship between the borrower and the GSA. Marciano V. Pangilinan, the sole member of the borrower, financed the initial construction of the courthouse and has been the property manager continuously for the past 17 years. As per the facilities management agreement, Marciano V. Pangilinan will be retained as sole manager through the end of the lease in 2037. The structure of the lease payments into two distinct rental payments, one for shell rent and the other for operating rent, further protects bondholders from lessee performance risk. Debt service is sized to be fully covered by the shell rent.

If the building is destroyed or rendered unfit for occupancy by fire or other casualty, rent is abated. However, the loan agreement requires the borrower to maintain property and casualty insurance equal to the lesser of either the replacement value of the property, appraised at $26 million recently, and bonds outstanding. The loan agreement further requires the borrower to maintain 18-months' business interruption insurance. We note that a two-year period of business interruption insurance is more typical of rated federal lease transactions. Another risk mitigant is the pledge of the mortgage on the property and facilities securing the bonds.

The government's right to termination for convenience is prohibited. This is a stronger feature than other rated federal lease transactions. The courthouse is also essential to the provision of federal government services on Guam. The district court was created by the Organic of Guam of 1950 vesting it with jurisdiction over federal law cases. The geographical remoteness of Guam makes a physical relocation of the court impractical.

As is the case with some other federal lease transactions, the structure increases the legal distance between bondholders and the obligor. MVP Federal Leasing, LLC has irrevocably assigned its rights to lease payments to bondholders. However, there is no non-consolidation opinion that bondholders would not be affected by the bankruptcy of the borrower. Unique for a federal lease transaction, the issuer is the Public Finance Authority of Wisconsin, a unit of government separate and distinct, and independent of the State of Wisconsin and its constituent counties acting as a conduit issuer.

CONSTRUCTION, ACCEPTANCE AND RENEWAL RISKS FULLY MITIGATED

There is no construction risk as the building was completed in 2000. Acceptance risk is minimal. Conditions for the acceptance of the lease by the GSA include relatively minor repairs to be funded with bond proceeds.

The 20-year term of the lease, from May 1, 2017 through April 30, 2037, coincides with the term of the 20-year bonds. This mitigates lease renewal risk.

Use of Proceeds

Proceeds of the bonds will repay a loan that financed the construction of the US District Courthouse in Hagatna, Guam in 2000. The five-story building houses the United States District Court & Magistrate Court of Guam, along with Probation Offices, the US Marshals Service, the Secret Service, and other federal agencies. Bond proceeds will also fund reserves and pay for costs of issuance.

Obligor Profile

The economy of the US is the world's largest, with a gross domestic product of $18 trillion in 2015. Its population of 321.6 million is third-largest.

Methodology

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.

Regulatory Disclosures

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 the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Julius Vizner
Lead Analyst
State Ratings
Moody's Investors Service, Inc.
7 World Trade Center
250 Greenwich Street
New York 10007
US
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Emily Raimes
Additional Contact
State Ratings
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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