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Rating Action:

Moody's downgrades Carousel Center Project PILOT revenue bonds to Ba2 from Baa3; removes from review; outlook negative

12 Jun 2019

Approximately $297 million PILOT revenue bonds affected

New York, June 12, 2019 -- Moody's Investors Service ("Moody's") has downgraded to Ba2 from Baa3 the rating on Syracuse Industrial Development Agency, NY's (SIDA) Carousel Center Project's PILOT Revenue Bonds Series 2007B, Series 2016A, Series 2016B and removes the rating from review for downgrade. The rating was placed on review on April 23, 2019 due to the transfer of the subordinate CMBS loan to special servicing, indicating difficulties extending or refinancing the loan. The outlook is negative.

Downgrades:

..Issuer: Syracuse Industrial Development Agency, NY

....Senior Unsecured Revenue Bonds, Downgraded to Ba2 from Baa3

....Underlying Senior Unsecured Revenue Bonds, Downgraded to Ba2 from Baa3

RATING RATIONALE

The downgrade to Ba2 reflects Moody's view that the Carousel Center will continue to be challenged to materially grow operating margins owing to its challenging operating environment that is unlikely to materially improve in the near term. As a result, while Carousel Center Company L.P. signed a three year loan extension and modification agreement with the special servicer of its subordinate CMBS loan on May 31, 2019, the ability to meet the new Debt Yield covenants in 2020 and 2021 to secure the second and third year of the loan extension remains uncertain. While we expect an equity contribution is likely to be needed in each year to reduce the total subordinate CMBS loan to satisfy the Debt Yield covenant for further annual extensions, the second year covenant calculation is likely to require a substantial amount of equity in order to achieve the third year of the loan extension. As such, the near term financial viability of Carousel Center Company L.P. may require additional equity support to reduce total leverage to a more manageable level. The strong parent company guarantee of the subordinate CMBS loan from the Pyramid Company of Onondaga, a general partnership, indicates a high likelihood of future equity support if needed.

While the loan extension provides time to execute the proposed business plan that has tangible agreements and other likely new tenants in the pipeline over the next few years, Carousel Mall will likely remain challenged to grow margins to meet an annually rising debt service repayment schedule at about 4% per year through the PILOT bond's maturity. The declining net operating income (NOI) for the last couple of years has steepened the NOI growth needed to keep pace with the rising PILOT bond debt service costs. The risk to future NOI is exacerbated by ongoing pressure from online retail competition and changes in user preferences for brick and mortar retail as well as general variations in demand through economic cycles.

The rating is supported by the mall's strong and established regional market position as a regional super mall with limited direct competition in the Syracuse region, as well as its continued ability to consistently attract visitors from a wider catchment area. However, this market position and cashflow predictability has been gradually diminished by online retail over the last several years.

The rating also incorporates the strength of the seniority of the PILOT payments and the enforcement of the PILOT payments with corresponding notes and mortgages that should result in full bondholder recovery in case of default. Moreover, the sponsor has a strong incentive to pay its PILOT obligations since failure to do so, barring an equity cure, would lead to a foreclosure and tax lien sale on the Carousel Center, resulting in a loss of collateral. We expect the PILOT revenue bonds to continue to be timely paid and to continue to benefit from their strong legal position with a first mortgage interest in the Carousel Mall (excluding the expansion), a cash funded $31 million debt service reserve fund, and an inability to accelerate the PILOT bonds. However, the borrower for the CMBS loan is Carousel Center Company L.P., the same obligor of the PILOT revenue bonds, which potentially exposes the PILOT bonds to a bankruptcy filing if operations weaken and reduce cashflow available to service the CMBS loan.

Rating Outlook

The negative outlook reflects the uncertainty surrounding the broader retail sector and Carousel's ability to timely execute its business plan to meet new Debt Yield covenants to ensure the CMBS subordinate loan extension continues beyond the first year. The outlook also incorporates the pressure the mall faces in a challenging market for brick and mortar retail while a portion of tenant leases are up for renewal or replacement each year.

Factors that Could Lead to an Upgrade

• A material reduction in debt and/or a corresponding material improvement in operating margins from new tenants or higher tenant rents and recoveries.

• The outlook could be changed to stable if NOI begins to grow or at least stabilize.

Factors that Could Lead to a Downgrade

• Continued deterioration in Carousel's operating or financial performance that further weakens debt service coverage

• Inability to meet Debt Yield targets resulting in need for a large equity infusion

• A decline in tax rates collected from tenants below scheduled SIDA PILOT payment increases

• Any use of the debt service reserve funds (DSRF) or need for servicing advances on the CMBS loan due to insufficient project cash flow

LEGAL SECURITY

The PILOT bonds are special obligations of SIDA, secured solely by the trust estate and funds held by the bond trustee pledged to secure the bonds, including scheduled PILOT payments for the existing Carousel Center (pursuant to a PILOT agreement between the Carousel owner and SIDA). The PILOT bonds are senior to the subordinate $300 million CMBS loan except under an unlikely casualty, condemnation, or eminent domain scenario. A cash-funded debt service reserve fund (DSRF) held under a guaranteed investment contract at $31 million satisfies the DSRF requirement of 125% of average annual debt service.

OBLIGOR PROFILE

Carousel Center Company, L.P. is a New York limited partnership and a single purpose entity with the sole purpose of owning and operating the Carousel Center. Syracuse Industrial Development Agency, NY (SIDA) is a public benefit corporation established to enhance the city's economic development, and has acted as the financing conduit by issuing the bonds on behalf of the Carousel Center Company, L.P.

METHODOLOGY

The principal methodology used in these ratings was Generic Project Finance published in April 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 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.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

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.

John Medina
VP - Sr Credit Officer
Project Finance Group
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

A.J. Sabatelle
Associate Managing Director
Project Finance Group
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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