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Rating Action:

Moody's downgrades Santa Fe's (NM) GO rating to Aa3 from Aa2 and confirms GRT and Water Utility ratings; outlook is stable

Global Credit Research - 27 Jul 2013

Downgrade affects $17.1M of GO bonds; confirmations affect $55.7M of GRT and $38.8M of Water Utility bonds

New York, July 27, 2013 -- Moody's Investors Service has downgraded the City of Santa Fe's (NM) General Obligation bond rating to Aa3 from Aa2, affecting $17.1 million of Moody's rated debt. At the same time, the Aa3 senior and A1 subordinate Gross Receipts Tax (GRT) ratings have been confirmed, affecting $55.7 million in outstanding debt. The city's water utility system revenue bonds have also been confirmed at Aa2, affecting $38.8 million in Moody's rated debt. The outlook on the city's debt portfolio has been revised to stable.

SUMMARY RATINGS RATIONALE

The ratings on Santa Fe's GO, GRT, and water system debt were placed on review for downgrade in April due to the city's large adjusted net pension liability (ANPL) relative to its rating category. The review was conducted as part of our new approach to analyzing state and local government pension liabilities, as outlined in our April 17, 2013 release "Moody's announces new approach to analyzing state and local government pensions; 29 local governments placed under review."

The GO rating downgrade to Aa3 from Aa2 reflects Santa Fe's large ANPL relative to its peers and rating category, which could present budgetary challenges and financial pressures over the long term. Increases in employer contributions could further stress the city, which already has high fixed costs as a percentage of the annual budget. The Aa3 rating also incorporates the city's large tax base anchored by governmental entities, favorable wealth indices, and adequate financial reserves. The Aa3 also reflects the city's modest debt burden.

The confirmation of the Aa3 senior and A1 subordinate GRT ratings reflects the modest increases in GRT collections, good debt service coverage levels, and satisfactory legal provisions that should prevent overleveraging of pledged revenues. The senior Aa3 GRT rating is now on par with the GO, which reflects the lack of legal separation between pledged GRT revenues and the city's general operations; this structure effectively caps the rating at the GO rating. The one notch distinction of the A1 subordinate GRT rating reflect the subordinate nature of the bonds.

The confirmation of the Aa2 rating on the city's water system bonds reflects the solid debt service coverage provided by net revenues of the system as well as the additionally pledged 0.25% capital outlay GRT. The Aa2 ratings also reflects the system's stable customer base, ample supply and system capacity, as well as the strong reserve levels maintained in the system's fund. The Aa2 also incorporates the average and manageable debt ratio of the system. The rating is now above the city's GO due to the minimal impact of pension costs on the system's financial operations.

STRENGTHS

-Large tax base anchored by governmental entities

-Adequate General Fund reserves

-Stabilized GRT collections with recent modest annual increases

-Favorable operations and reserves of the water utility system

CHALLENGES

-Large ANPL in comparison to its peers and rating category

-High amount of fixed cost relative to the size of the budget

-Heavy reliance on GRT revenues for general operations

STABLE OUTLOOK

The assignment of the stable outlook reflects the expectation that the recently passed reform will improve the overall funding status of the pension plan. The outlook also reflects our expectation that management will be able to maintain near-balanced financial operations in the immediate future. Additionally, we anticipate the city's economy will continue to experience modest growth over the medium term.

WHAT COULD MAKE THE GO RATING GO UP

- Substantial diversification and economic expansion measured by assessed valuation growth

- Trend of operating surpluses that increase General Fund reserves significantly

- Significant reduction in adjusted net pension liability

WHAT COULD MAKE THE GO RATING GO DOWN

-Imbalance of operations resulting in erosion of reserve levels

-Significant tax base contractions measure by assessed valuation declines

WHAT COULD MAKE THE GRT RATING GO UP

-Upward movement of the GO rating coupled with substantial increases in GRT collections

- Trend of operating surpluses that increase General Fund reserves significantly

WHAT COULD MAKE THE GRT RATING GO DOWN

-Trend of declining GRT collections resulting in decreased MADS coverage

-Further leveraging of the security that weakens MADS coverage

-Negative rating action on the city's GO

WHAT COULD MAKE THE WATER UTILITY RATING GO UP

-Significant increases in debt service coverage levels and financial reserves

WHAT COULD MAKE THE WATER UTILITY RATING GO DOWN

-Declines in debt service coverage levels

-Erosion of reserve levels

-Increased debt ratio

The principal methodology used in the GO rating was General Obligation Bonds Issued by US Local Governments published in April 2013. The principal methodology used in the water utility system rating was Analytical Framework For Water And Sewer System Ratings published in August 1999. The principal methodology used in the gross receipts tax rating was US Public Finance Special Tax Methodology published in March 2012. 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.

John Grayson Nichols
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

Thomas Aaron
Analyst
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 Santa Fe's (NM) GO rating to Aa3 from Aa2 and confirms GRT and Water Utility ratings; outlook is stable
No Related Data.

 

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