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Rating Action:

Moody's assigns initial A2 to Karegnondi Water Authority's (MI) $220M Water Bonds, Ser. 2014A

20 Mar 2014

Affirms A2 rating on Genesee County's outstanding GOLT debt

New York, March 20, 2014 --

Moody's Rating

Issue: Water Supply System Bonds (Karegnondi Water Pipeline), Series 2014A; Rating: A2; Sale Amount: $220,000,000; Expected Sale Date: 04-01-2014; Rating Description: General Obligation Limited Tax

Opinion

Moody's Investors Service has assigned an initial A2 to the Karegnondi Water Authority's (KWA) $220 million Water Supply System Bonds (Karegnondi Water Pipeline), Series 2014A. Concurrently, Moody's has affirmed the A2 rating on Genesee County's outstanding General Obligation Limited Tax (GOLT) debt. The Series 2014A bonds are secured by contractual payments from Genesee County and the City of Flint, which are secured by the GOLT pledges of the county and city for their respective contractual payments. Genesee County is further required, under the financing contract, to correct any payment shortfall on the part of Flint. Contractual payments are expected to be paid with net revenues of the water enterprises of both entities. Proceeds from bonds will finance a portion of the cost to construct a water supply system to KWA member communities.

SUMMARY RATINGS RATIONALE

The A2 rating on KWA's Series 2014A bonds is based on the GOLT credit quality of Genesee County given the GOLT pledge for contractual payments and the requirement for the county to step up to fully cover any payments missed by the City of Flint. Moody's assessment of Genesee County's ability to absorb the full amount of debt service is a key rating factor given ongoing financial distress within the City of Flint. The A2 rating also reflects solid security features incorporated into the financing and underlying water supply contracts including provisions for monthly capital set asides and a debt service reserve fund. The A2 rating on Genesee County's outstanding GOLT debt reflects the county's large tax base that has realized a multi-year trend of material depreciation, relatively narrow financial position with very limited liquidity, and modest debt burden that increases significantly if debt service for current and future KWA issuances fail to be supported by the county's water enterprise.

STRENGTHS

- Strong project management and planning, coupled with minimal project complexity, help mitigate construction risk

- Step-up provisions require Genesee County to fully cover debt service if the City of Flint cannot meet its obligation

- Sizable service area with potential for further expansion

- Participants have significant rate setting flexibility

CHALLENGES

- Financial distress within the City of Flint increases the likelihood that Genesee County will be solely responsible for debt service

- KWA issuances substantially increase Genesee County's debt burden if local unit water enterprises do not remain self-supporting

- Long-term economic stress in the service area as indicated by the multi-year trend of tax base devaluation and above average unemployment

WHAT COULD CHANGE THE RATING -- UP (KWA)

- Upward movement in Genesee County's GO rating

WHAT COULD CHANGE THE RATING -- DOWN (KWA)

- Downward movement in Genesee County's GO rating

- Failure of Genesee County to promptly adjust rates if called upon to make payments on behalf of the City of Flint

- Deterioration of water enterprise operations of Genesee County or the City of Flint

WHAT COULD CHANGE THE RATING -- UP (Genesee County)

- Material improvement in economic indicators, including appreciation of the county's tax base, improvement in demographic trends, and further moderation of the unemployment rate

- Growth in General Fund liquidity that limits the need to rely on other funds for annual cash flow

WHAT COULD CHANGE THE RATING -- DOWN (Genesee County)

- Further, material declines in the county's tax base that put additional downward pressure on revenues

- Continued economic stress as measured by a worsening of the county's unemployment level or renewed destabilization of major employers

- Operational imbalances in the county's General Fund that contribute to a narrowing of existing financial reserves

- Failure to rebuild cash reserves in the General Fund and improve annual cash flow

PRINCIPAL METHODLOGY

The principal methodology used in the rating of the Karengnondi Water Authority bonds was US Local Government General Obligation Debt published in January 2014. The additional methodologies used in the rating of the water supply bonds were U.S. Municipal Pool Program Debt published in March 2013 and Analytical Framework For Water And Sewer System Ratings published in August 1999. The principal methodology used in the rating of the Genesee County bonds was US Local Government General Obligation Debt published in January 2014. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

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 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 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.

David Levett
Associate Analyst
Public Finance Group
Moody's Investors Service, Inc.
100 N Riverside Plaza
Suite 2220
Chicago, IL 60606
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Henrietta Chang
VP - Senior Credit Officer
Public Finance Group
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

Moody's assigns initial A2 to Karegnondi Water Authority's (MI) $220M Water Bonds, Ser. 2014A
No Related Data.
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