Negative Watch for Hercules, Calif., bonds

Standard & Poor’s Wednesday placed three series of the Hercules Public Finance Authority’s BB-rated bonds on watch for a potential downgrade.

The rating agency said it took action on the California authority’s electric system project revenue bonds and lease revenue bonds over concerns about the Bay Area city’s willingness to cover its obligations tied to the debt.

“The CreditWatch placement reflects our uncertainty surrounding the city’s willingness to pay its obligations after the city’s statements in a Sept. 25, 2012, material event notice,” said analyst Sussan Corson.

Hercules said in a disclosure filing to the Municipal Securities Rulemaking Board’s EMMA website that its bond counsel has advised the city that it may be required to defease all or part of the bonds in order to keep them tax-exempt if it sells its electric utility as part of its plan to improve its finances.

Electric utility revenues don’t cover debt service, and the city is using unspent bond proceeds to fill in the gap. Hercules officials estimate the sale could take at least eight months.

In August, the city used $745,000 of bond proceeds to pay debt service, leaving $4.5 million. It plans to use $800,000 of the bond money for capital projects this fiscal year, leaving the rest as a buffer for debt service until the utility is sold.

S&P said the city entered into a cooperation agreement with the finance authority to make necessary bond payments no later than five days before it is due, which is an “absolute obligation.”

However, in the EMMA filing Hercules said it “does not anticipate that there will be any available funds to make such advances in the foreseeable future and does not expect to make any such advances.”

For reprint and licensing requests for this article, click here.
California
MORE FROM BOND BUYER