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Rating Action:

Moody's downgrades Salisbury, NC's GO Bonds to A3; COP and Bank Certificates to Baa3, and Combined Enterprise System Revenue Bonds to A3; assigns negative outlook

Global Credit Research - 11 Apr 2014

Downgrades affect $3.3M of GO Bonds, $35.4M in COP and Bank Certificates, and $30.5M of Revenue Bonds

New York, April 11, 2014 -- Moody's Investors Service has downgraded the City of Salisbury's (NC) General Obligation bond rating to A3 from Aa2 affecting $3.3 million in outstanding parity obligations. Additionally, Moody's downgraded, to Baa3 from A1, the city's Certificates of Participation (COP) affecting $18.4 million. The city has an additional $17.0 million in parity Bank Certificate obligations downgraded to Baa3 from A1. Lastly, Moody's downgraded to A3 from Aa3, the rating on the city's Combined Enterprise System revenue bonds affecting $30.5 million in Moody's rated debt.

The city's general obligations are secured by the full faith and credit of the city. The COP and Bank Certificates are secured by the city's annually-appropriated lease payments to the Trustee as well as a first lien on the financed assets. Finally, the Combined Enterprise System Revenue Bonds are secured by the net receipts of the city's water system and wastewater system.

RATING RATIONALE

The GO downgrade to A3 primarily incorporates the city's outsized enterprise risk associated with its broadband enterprise (Fibrant), with considerable operating pressure should the Fibrant continue to underperform. The rating also reflects Salisbury's stable, slightly concentrated tax base, a healthy General Fund reserve, and a modestly elevated direct debt burden.

The downgrade to A3 on the city's combined enterprise system revenue bonds primarily reflects the system's ongoing operational support of broadband system which has resulted in a history of borrowing water & sewer fund liquidity to balance operations and meet debt service requirements of the fiber optic network. Over the past few years, $7.6 million was redirected from the city's water & sewer enterprise to support the fiber optic network which has resulted in a narrowed but still acceptable cash position for the water & sewer fund. The city reports no plans for principal repayment and does not include repayment in their pro-forma calculations. The rating further considers the quality of the receivable owed to the combined enterprise by the fiber optic network. Additionally, the rating incorporates Salisbury's stable service area with ample system capacity and a manageable debt profile.

The COP and Bank Certificate downgrade to Baa3 reflects a widened notching relative to the GO for the non-essential asset which has experienced operational and debt payment shortfalls since inception. In 2008, the city issued COP and privately placed bank certificates to construct "Fibrant", a fiber-to-the-home network. Currently, the city has met debt service requirements by renegotiating the terms of the private placement principal maturities and borrowing cash from the city's water and sewer fund. Additionally, the rating incorporates the over-leveraged (157%) asset associated with the COP and Bank Certificates.

The negative outlook reflects Moody's belief that the city's broadband system will continue to be challenged to meet its forecasted financials which include customer growth and a rate increase that has not yet been adopted. It also reflects the city's lack of budgeting for COP and Bank Certificate debt service from its general fund. A continued reliance on extraordinary borrowing from the water and sewer fund, rather than paying COP and Bank Certificate debt service from the broadband enterprise or the general fund budget, could result in additional negative pressure on the credit.

STRENGTHS

- Stable tax base with slight concentration

- LGC state oversight

- Stable Water and Sewer operations

CHALLENGES

- Significant operating pressure from enterprise risk

- Limited enterprise liquidity

- Over-leveraged non-essential asset profile

WHAT COULD MAKE THE RATING GO -- UP (Remove negative outlook)

- Sustained stabilization of Broadband (Fibrant) operations

- Reduced inter fund liabilities

WHAT COULD MAKE THE RATING GO -- DOWN

- Deterioration in the General Fund reserves

- Continued deterioration of the City's Water and Sewer Enterprise

- Fibrant's continued reliance on other city funds to balance operations

The principal methodology used in this rating was Analytical Framework For Water And Sewer System Ratings published in August 1999. 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.

Kenneth Surgenor
Associate Analyst
Public Finance Group
Moody's Investors Service, Inc.
600 North Pearl Street
Suite 2165
Dallas, TX 75201
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Gera M. McGuire
Vice President - Senior Analyst
Public Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
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JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's downgrades Salisbury, NC's GO Bonds to A3; COP and Bank Certificates to Baa3, and Combined Enterprise System Revenue Bonds to A3; assigns negative outlook
No Related Data.

 

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