Nearly $1B of Indianapolis Water Debt Dropped to A2 by Moody’s

CHICAGO — Moody’s Investors Service last week cut its rating one notch to A2 and assigned a negative outlook to nearly $1 billion of Indianapolis water bonds.

The downgrade comes as a state regulatory board launches hearings Wednesday on the city’s high-profile $1.9 billion plan to sell its water and sewer departments to a nonprofit ­utility.

Standard & Poor’s, which assigns a AA-minus rating with a negative outlook to the debt, also recently reviewed the credit, city officials said.

Fitch Ratings assigns an A-plus with a negative outlook to the city’s water bonds.

The Indianapolis Department of Water serves nearly one million customers in and around the triple-A rated city and Marion County.

The Moody’s downgrade affects $912 million of outstanding bonds that are payable from the Water Department’s net revenues. 

Debt-service coverage levels on the water bonds have fallen below covenant thresholds since 2008, Moody’s warned. The uncertainty of future rate increases and a significantly weakened unrestricted cash position also drove the downgrade, analysts said.

Indianapolis officials said it was unlikely that the downgrade would affect the proposed sale.

In fact, the credit hit could even strengthen the city’s position before the state board, according to Deron Kintner, executive director of the Indianapolis Local Public Improvement Bond Bank, the city’s borrowing arm.

“It’s more of a reason why the transfer should take place,” Kintner said.

Moody’s analyst Iliana Beltran said the rating agency at this point is not considering the proposed sale’s impact on the credit. 

Citizens Energy Group, a nonprofit trust that currently runs the city’s gas utility, would pay at least $425 million and assume nearly $1.5 billion of outstanding debt to acquire the water and sewer assets.

The Indiana Utility Regulatory Commission Wednesday will hold a public hearing considering the sale. Several groups have already filed objections, including a consumer ratepayer group objecting to a $29 million termination fee with the company that currently operates the water department.

A decision is not expected until the spring.

The sale of the utilities is contingent on the state’s approval of a rate increase, and the credit would likely continue to weaken without a fresh rate increase, analysts said.

The city asked the IURC for a 33% rate increase last year. The board is still considering the move, though officials had hoped for a decision last October, prior to rating reviews.

“The delay has hurt the numbers,” Kintner said.

The water and sewer utility suffered downgrades and a weakened fiscal position starting in 2008 due to problems with variable-rate debt, including negative swap valuations and downgrades of credit and liquidity providers.

At the time, the troubled variable-rate debt totaled nearly 60% of the Water Department’s total portfolio, and was so problematic that it forced the city to seek an emergency rate increase. Indiana officials granted the request.

The Local Public Improvement Bond Bond Bank refinanced the debt throughout 2009 and all the water debt is currently in a fixed-rate mode.

Moody’s warned that debt-service coverage levels could continue to suffer without a rate increase.

 “The negative outlook has been assigned due to lack of clarity as to what the longer-term range of debt service coverage that will be tolerated under future rate orders will be,” Beltran wrote in a report on the downgrade.

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