The mayor of Collingswood, N.J., criticized Moody’s Investors Service for imposing a rare “super downgrade” on it — six notches to Ba1, or junk status, from A1, affecting $27.8 million of outstanding rated debt.
“We’re not given a fair picture,” James Maley, mayor of the borough seven miles southeast of Philadelphia, said in an interview Tuesday.
In a report late Monday, the rating agency questioned whether Collingswood can make payments within 30 days on its notes. The borough, which has a population of around 14,000, is a guarantor for an $8.5 million redevelopment loan that matures Oct. 7.
Moody’s placed Collingswood on a watch list for a possible further downgrade, and expects to complete its review within 30 days. “They have a very large exposure to the real estate market and they have what is now a direct debt,” said Moody’s analyst Josellyn Yousef.
In May 2006, LumberYard Redevelopment LLC entered into an $18 million revolving bank loan to build the LumberYard Condos, consisting of 119 residential and 21 commercial units. The company expected full occupancy within five years. While the developer was expected to repay the debt service, the loan was also secured by a guaranty from the borough.
After the housing downturn, the agreement was twice modified, most recently in May 2010, leaving a revolving bank balance of $10 million, with $8.5 million now remaining.
According to Moody’s, Collingswood officials have requested the lender, Thrift Institutions Community Investment Corp., extend the maturity date by one year, but the lender wants the borough to first reduce the balance to $4 million.
“The bank is working with us. We’re pretty well set,” Maley said.
Collingswood is introducing an ordinance that would allow it to issue $4.5 million of bond anticipation notes, which the borough would use to purchase unsold condominiums and pay down the balance to $4 million.
Moody’s said the borough over the next month must issue Bans and get an extension on its line of credit. Borough officials are negotiating an immediate extension of the loan for one month, to Nov. 7, to give it time to adopt its bond ordinance.
“We will be evaluating Collingswood’s actions in regards to the bond anticipation note and line of credit extension,” Yousef said.
“There is an agreement, although it hasn’t been memorialized in writing,” Maley said. “I don’t have any problem saying we’ll get an extension on our line of credit by Oct. 7. We just haven’t adopted it in a way that satisfies Moody’s. I don’t know what kind of oversight they’re under that would make them take this action.”
In addition, Collingswood has two unrelated note issues of $2.65 million that mature on Sept. 29, which the borough intends to roll over. “With $1.24 million in cash as of the last audit [Dec. 31], the borough will need market access to meet these payments as well,” Moody’s said.
The borough’s 2010 financial statement mentioned the loan obligation but not the Oct. 7, 2011, maturity date.
“That’s not very good disclosure,” said Alan Schankel, a managing director and head of fixed-income research and strategy for Janney Capital Markets in Philadelphia. “It’s hard for cities to say the ratings agencies aren’t treating them fairly.”
Moody’s issued only 102 multi-notch downgrades, or less than 1%, among its 18,000 rating actions in the past 18 months. Of the 102 total, 59 are housing related, according to Moody’s managing director Jack Dorer.
“Often they involve sectors within public finance that are exposed to real estate,” he said.
