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Rating Action:

Moody's assigns Aa2 to Grand Rapids Building Authority's (MI) 2019 Revenue Refunding Bonds; outlook stable

30 Aug 2019

New York, August 30, 2019 -- Moody's Investors Service has assigned a rating of Aa2 to the Grand Rapids Building Authority's (MI) approximately $18.7 million of Building Authority Revenue Refunding Bonds in two series -- Series 2019A (Tax Exempt) and Series 2019B (Federally Taxable) - which are secured by lease payments from the State of Michigan (Aa1, stable). The bonds are expected to be priced on September 17. The outlook is stable.

RATINGS RATIONALE

The rating is a notch below the state's Aa1 general obligation rating to reflect the risk of non-appropriation of state lease payments supporting the bonds. This risk is minimal, in view of the essential purpose of the project financed by the debt (a state office building), as well as the moderate legal structure of the underlying documents. Michigan benefits from recent years' improved economic performance and diversification as well as its success in rebuilding financial reserves. The state's strong financial position will offset its significant vulnerability to escalating trade tensions. Reserve rebuilding to date also underscores proactive fiscal management. While Michigan has somewhat heightened pension liabilities, it has taken steps to address them, such as by putting incoming public school teachers into retirement plans that remove the funding risks associated with traditional defined benefit pensions.

RATING OUTLOOK

Michigan's stable outlook, which applies to these bonds because the state is the obligor, is supported by governance practices that make rapid fiscal adjustment likely in the event of economic or revenue challenges. It is also supported by an economic base that has become more diversified, although it remains exposed to factors that adversely affect the US car manufacturing industry.

FACTORS THAT COULD LEAD TO AN UPGRADE

-Upgrade of the state

FACTORS THAT COULD LEAD TO A DOWNGRADE

-Downgrade of the state

-Evidence of reduced commitment to passing timely appropriations for debt service

LEGAL SECURITY

The bonds are supported by lease rental payments, which require annual appropriation by the state legislature. The state has no ongoing legal obligation to make such appropriations, a risk typical of state government lease obligations. The state's Department of Technology, Management and Budget will make these payments under a sublease with Grand Rapids (Aa2, stable) that runs from October 1, 2019, through September 30, 2028. The sublease covers the scheduled payments on the refunding bonds, which have a final maturity in 2028. The state has an exclusive right to purchase the project at the end of the sublease.

The sublease is subject to abatement if the project becomes unusable. In addition, as in the case of some other Michigan appropriation bonds, the documents contain provisions allowing the state to terminate its obligation under certain circumstances, such as if contractors working on the properties violate state labor laws. Although these provisions mean that the leases could be terminated without an act of non-appropriation, the termination provisions do not add substantial risk to leases that already carry non-appropriation risk, in our view.

Debt service payments on the bonds are due semiannually, on April 1 (interest only) and October 1 (principal and interest). Because the state begins its fiscal year in October, it is notable that the October 1 payment will be funded by rental payments in the preceding fiscal year. This schedule allows ample time for the state to avoid non-payment caused by late budget adoption.

USE OF PROCEEDS

The bonds will refund outstanding debt issued in 2002 and 2004, through redemptions of the prior debt scheduled for October 2019. The original debt financed the state's purchase of an office building in the city of Grand Rapids for use by the Secretary of State, which provides public services such as motor vehicle titling and registration renewal processing. The state also sublets a portion of the building to the U.S. Bankruptcy Court, although funds received from that lease are not pledged to the new bonds.

PROFILE

The Grand Rapids Building Authority is a conduit issuer incorporated by the city of Grand Rapids in 1965 under state law. It also has issued debt on behalf of the city of Grand Rapids that is secured by the city's general obligation pledge. The State of Michigan is the 10th-largest state based on population, with just under 10 million residents, according to the US Census Bureau's estimate for 2018. It ranks 14th-largest based on its economy, which was $528 billion in 2018 according to the US Bureau of Economic Analysis.

METHODOLOGY

The principal methodology used in these ratings was Lease, Appropriation, Moral Obligation and Comparable Debt of US State and Local Governments published in July 2018. 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, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

Edward Hampton
Lead Analyst
State Ratings
Moody's Investors Service, Inc.
7 World Trade Center
250 Greenwich Street
New York 10007
US
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Emily Raimes
Additional Contact
State Ratings
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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