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Rating Action:

Moody's downgrades Pontiac City School District's (MI) GOULT issuer rating to B3 from B1 and the district's GOLT debt to Caa1 from B2

Global Credit Research - 05 Jun 2013

B3 rating affects $14.8 million in debt; rating remains under review for possible downgrade

New York, June 05, 2013 -- Moody's Investors Service has downgraded to B3 from B1 the general obligation unlimited tax (GOULT) issuer rating of the Pontiac City School District (MI). Concurrently, Moody's has downgraded to Caa1 from B2 the district's outstanding general obligation limited (GOLT) tax debt. The ratings remain under review for possible downgrade. The district has $14.8 million of rated general obligation limited debt outstanding.

SUMMARY RATINGS RATIONALE

The downgrade of the GOLT rating to Caa1, and GOULT issuer rating to B3, was triggered by the district's GOLT default on May 1, 2013 when it failed to make a debt service payment of approximately $1.4 million for its Series 2006 School Building and Site Bonds. The bulk of the district's outstanding indebtedness comprises GOLT bonds, which are secured by the district's general obligation limited tax pledge payable from all operating revenues, subject to constitutional and statutory limitations. Although the GOLT bonds were insured by Syncora Guaranty, the insurer was not notified of the default by the paying agent until May 21. The district filed an EMMA notice on May 24 indicating a claim had been made. As of this date, the district has not repaid the insurer, though Syncora covered the debt service due bondholders within days of its notification from the paying agent.

The B3 issuer rating also incorporates the district's overall severely challenging credit position, with a General Fund deficit balance now exceeding 50% of revenues after years of operating imbalance; continued significant enrollment declines that factor unfavorably into the state aid formula and forced a major downsizing; and continued economic stress. The district's poor cash position was exacerbated by the state's recent refusal to approve a tax anticipation cash flow note, which the district typically issues each April. The Caa1 rating on the district's outstanding general obligation limited tax debt is one notch below the issuer rating, reflecting the constraints on the district's operating revenues from which GOLT debt service is paid. The rating is under review for downgrade given the uncertainty regarding the amount and timing of recovery on the missed May 1st debt service payment, the high probability that the district will need to borrow for its upcoming debt service payments, and continued deterioration of the district's cash flows. We expect to resolve the review pending updated financial information from the district as well as details of the district's plan for reimbursement to the insurer.

The district's upcoming June 15 debt service payments for GOULT debt are likely to be paid through borrowing from state school loan revolving fund.

STRENGTHS

- Economic base includes the institutional presence of Oakland University and Chrysler world headquarters

- Recent stabilization of automotive industry

- Modest debt burden supported by rapid amortization

- Implementation of significant expenditure reductions

CHALLENGES

- Uncertainty regarding the timing and extent of recovery on defaulted payments

- Extremely stressed liquidity resulting in an inability to meet cash flow needs

- Significant and ongoing enrollment declines that have forced major downsizing and state aid losses

- Poor financial management practices including borrowing from the debt service funds for operations

- History of the state withholding aid, which further stressing cash flows

- Continuation of structurally imbalanced operations resulting in large deficit fund balance position

- Limited revenue raising flexibility with high dependence on state foundation allowance

- High degree of management instability

- Severely stressed tax base with substantial valuation declines

OUTLOOK

The rating remains under review for downgrade due to the uncertainty regarding the amount and timing of recovery on the missed May 1st debt service payment, the high probability that the district will need to borrow for its upcoming debt service payments as a result of General Fund borrowing from the district's debt service fund, and continued deterioration of the district's cash flows. The review will also consider the relative relationship between the ratings on the district's general obligation unlimited tax and general obligation limited tax debt, given that the district may have borrowed from the fund supported by its dedicated debt service levy to fund pressured operations. We expect to resolve the review pending updated financial information from the district as well as details of the district's plan for reimbursement to the insurer.

WHAT COULD CHANGE THE RATING UP (or removal of ratings under review)

- Repayment of missed debt service payment in full

- Improved liquidity and cash flow

- Reduced reliance on cash flow borrowing to fund operations

-Improvement in accounts payable

WHAT COULD CHANGE THE RATING DOWN

- Failure to repay missed debt service payment

- Failure to make upcoming debt service payment

-Further deterioration in the district's cash flows, putting at risk future repayment of obligations

- Increase in likelihood of bankruptcy filing

RATING METHODOLOGY

The principal methodology used in this rating was General Obligation Bonds Issued by US Local Governments published in April 2013. Please see the Credit Policy 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 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 downgrades Pontiac City School District's (MI) GOULT issuer rating to B3 from B1 and the district's GOLT debt to Caa1 from B2
No Related Data.

 

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