Downgrade and negative outlook affect $25.7 million in outstanding debt, inclusive of current issuance
New York, April 11, 2013 --
Moody's Rating
Issue: General Obligation School Bonds, Series 2013;
Underlying Rating: A2; Enhanced Rating: Aa1; Sale
Amount: $5,000,000; Expected Sale Date:
4-16-13; Rating Description: General Obligation
Opinion
Moody's Investors Service has downgraded to A2 from A1 the underlying
general obligation debt rating for Moriarty-Edgewood School District
No. 8 (NM). Concurrently, Moody's has also assigned
a A2 underlying rating and negative outlook to the sale of the district's
$5 million General Obligation School Bonds, Series 2013.
The rating actions affect approximately $25.7 million in
general obligation debt, inclusive of the current issuance.
Proceeds from the Series 2013 bonds will be used to fund various campus
improvements and renovations.
Additionally, we have assigned a Aa1 enhanced rating and negative
outlook to the current sale based on the New Mexico School District Enhancement
Program. In conjunction with assignment of a negative outlook on
the U.S. government, the outlook for the State of
New Mexico has been revised to negative due to indirect links between
the state and the federal government. The negative outlook is also
applicable to the Aa1 enhanced rating. For further information
on the negative outlook on the state, please see the special comment
from December 7, 2011 entitled "Most Aaa-Rated State and
Local Governments Revert to Stable Outlooks, Despite Negative Pressure
on U.S. Government Rating" for more information.
SUMMARY RATING RATIONALE - UNDERLYING
The bonds are general obligations of the district, payable from
ad valorem taxes levied against all taxable property within the district
without limitation as to rate or amount. The downgrade and assignment
of the A2 rating reflects the district's narrow financial reserve position
after multiple years of imbalance, modestly-sized tax base,
and an average socioeconomic profile. The A2 rating also incorporates
the district's modest debt burden with above average principal amortization.
The assignment of the negative outlook reflects the expectation of continued
financial pressures due to a declining student enrollment base.
STRENGTHS
-Modestly-sized tax base continues to experience growth
due to appreciation
-Modest debt burden with above average principal amortization
CHALLENGES
-Narrow financial reserve position after four consecutive years
of operating deficits
-Significant trend of declining student enrollment levels
SUMMARY RATING RATIONALE - ENHANCED
Assignment of the Aa1/Negative Outlook enhanced rating for the proposed
transaction is based upon our assessment of the Post March 30, 2007
New Mexico School District Enhancement (NMSDE) Program and a review of
the district's proposed financing.
PROGRAMMATIC ENHANCED RATING RATIONALE
The NMSDE Post-March 30, 2007 program demonstrates generally
average to strong state commitment and program history as defined by the
first factor of the intercept methodology published February 2008.
The funds available for intercept are the current fiscal year's undistributed
state aid (state equalization guarantee distribution, or SEG) to
a school district. State oversight of the program is strong as
school district budgets must be reviewed and approved by the New Mexico
Public Education Department (PED). Upon issuance of its general
obligation bonds, a school district must file with the New Mexico
Department of Finance and Administration (DFA) a copy of the bond resolution,
offering documents, and paying agent agreements as well as contact
information. The state's oversight is further reflected in the
NMSDE Post-March 30, 2007 authorizing legislation requirement
that, if a debt service payment is made on behalf of a school district,
the DFA will initiate an audit of the school district and assist in implementing
measures to ensure that future payments will be made on a timely basis.
Per authorizing statute, the state covenants that it will not repeal,
revoke or rescind the provisions of the intercept statute or modify or
amend it so as to limit or impair the rights and remedies granted by the
statute, though modifications to the amount and timing of state
aid payments would be permitted. The expectation of continued state
support is strong as the intercept program benefits school capital financings,
an essential public purpose. Though the program has never been
utilized, the state has demonstrated strong commitment to school
capital financings and the intercept program's mechanics should result
in full and timely payment of debt service, if the program were
to be invoked.
The NMSDE Post-March 30, 2007 program demonstrates generally
average to strong program mechanics, the second factor of the intercept
methodology. Intercept mechanics are established in statute and
in an administrative policy document outlining implementation of the program.
The mechanics of the intercept program direct the paying agent to notify
the DFA if payment of principal or interest on school district general
obligation bonds has not been received on the business day immediately
prior to the date on which the payment is due. Upon notification
by the paying agent and confirmation that the payment has not been made
to the paying agent one business day prior to the due date, the
DFA must forward from available funds (as described above) the amount
due to the paying agent. The state has a history of passing budgets
on time. Moody's therefore concludes that late budget passage likely
will not be a factor placing at risk the availability of funds under the
intercept program. Based on the overall assessment of program mechanics
described above, Moody's categorizes program mechanics as generally
average to strong. However, the one business day notification
requirement regarding a missed debt service payment is considered to be
a weak factor.
FINANCING LEVEL ENHANCED RATING RATIONALE
While Moody's has assigned a programmatic rating of Aa1, with a
negative outlook to the NMSDE Post-March 30, 2007 program,
rating actions on specific credits that benefit from the intercept program
depend on the evaluation of each according to the additional rating factors
for individual intercept financings, including the sufficiency of
interceptable revenues as determined by specific coverage tests,
the timing of the state's fiscal year as it relates to scheduled debt
service payment dates and transaction structure, which will consider
the role of the independent fiduciary and reserve fund.
The financing level rating rationale is based on an additional two factors;
revenue sufficiency and transaction structure. Just as with the
two factors considered for the programmatic rating, analysts score
subfactors as strong, average or weak. Financings that achieve
strong or average scores on a majority of subfactors will usually achieve
ratings that are equivalent to the program level rating, whereas
financings with weaker scores will be rated one or more notches lower
than the program level rating.
Based on SEG budgeted for state fiscal year 2013, interceptable
revenues from the state for Moriarty-Edgewoood School District
No. 8 (NM) provide a strong minimum of 1.71 times coverage
of maximum periodic debt service. Further, state revenues
provide a strong minimum 1.57 times maximum annual debt service
coverage when coverage is calculated without the benefit of the state's
final monthly state aid payment within a fiscal year. This calculation
serves as a stress test to evaluate the sufficiency of interceptable aid
even if the state were to delay the final state aid payment within a fiscal
year. The stability of state aid is rated as weak given recent
mid-year cuts in state aid to address fiscal stress at the state
level. However, this weakness is somewhat mitigated by a
continued level of ample debt service coverage as previously discussed.
The fact that SEG can be accelerated to make debt service payments,
if necessary, is considered a strong credit factor. The fact
that the last principal payment is scheduled to be paid in May,
eleven months into the state's fiscal year is considered to be strong.
In terms of the transaction structure, the program requires the
appointment of a third-party fiscal agent: Bank of Albuquerque
for the current sale. The fiscal agent is required to notify the
state if an intercept of SEG is required, a characteristic that
is considered as average. While there is no debt service reserve
fund, such a fund is not typically utilized to support intercept
financings supporting school districts.
Since the financing factors for the proposed transaction are generally
considered strong or average, Moody's has assigned an enhanced rating
to the forthcoming transaction that is equivalent to the programmatic
rating of Aa1 with a negative outlook.
NEGATIVE OUTLOOK
Moody's has revised Moriarty-Edgewood School District No.
8's (NM) outlook to negative given the continued budgetary pressure
stemming from significant student enrollment declines. As enrollment
levels are expected to continue to decline, management's inability
to balance financial operations could have potential downward pressure
on the rating, as it would impact the district's already narrow
financial reserve position.
WHAT COULD MAKE THE RATING GO UP (OR REMOVAL OF THE NEGATIVE OUTLOOK)
-Trend of operating surpluses, significantly augmenting financial
reserves
- Sustained student enrollment growth
-Tax base expansion, measured by significant assessed valuation
growth
WHAT COULD MAKE THE RATING GO DOWN
- Continued trend of structural imbalance resulting in depletion
of financial reserves
- Continued student enrollment declines that are not properly managed
by district officials
- Economic contractions measure by assessed valuations declines
PRINCIPAL METHODOLOGY
The principal methodology used in rating the underlying rating was General
Obligation Bonds Issued by U.S. Local Governments published
in October 2009. The principal methodology used in rating the enhanced
rating was State Aid Intercept Programs and Financings: Pre and
Post Default 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.
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
Kristin Button
Vice President - Senior 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 to A2 from A1 the rating on Moriarty-Edgewood School District No. 8's (NM) outstanding GO debt; Assigns A2 to $5 million GO School Bonds, Series 2013; Outlook is negative; Also assigns Aa1/Negative enhanced rating
