BRADENTON, Fla. - Moody’s Investors Service Monday downgraded LaGrange, Ky.’s general obligation bonds and lease revenue notes to Ba2 from A3.
The junk-level rating affects $11 million in parity debt rated by Moody’s and backed by the city’s general obligation pledge. The outlook remains negative.
“The rating reflects the city’s debt structure and the uncertainty surrounding the city’s ability to retire its lease-revenue debt,” analyst Karolina Norris said.
The city issued lease revenue notes in 2012 through the Oldham-LaGrange Development Authority. The notes are backed by lease payments from the city and its GO pledge, and have a scheduled principal payment of $8.1 million in June 2015.
The original bonds were used to purchase and develop 1,000 acres of land for office buildings and other commercial purposes. The Development Authority has been unable to sell most of the land, according to Norris.
“Absent any sales to repay note holders, the city is responsible for the debt and will depend on market access for continued refinancing of the notes,” she said.
The city planned to refund the 2012 notes with long-term GO debt in the spring of 2014, though debt retirement depends on the ability of the city to generate additional revenues to service these bonds, Norris said. The current projections for the restructuring propose a 20-year maturity and level debt service around $600,000 annually.
To generate additional revenue to support the refinancing, the city’s mayor introduced legislation proposing a local payroll tax on salaries and wages that would bring in an estimated $600,000 annually and would be in place until the debt was retired. The legislation was voted down on July 1.
“The mayor reports that no alternatives to the payroll tax have been introduced and that the city will likely be forced to default on the scheduled principal payment of $8.1 million in June 2015,” said Norris. “Moody’s views the failure to implement the new revenue source in order to pay the city’s debt obligations as indicative of a substantial credit risk.”
Without a plan to repay note holders in the near term, Moody’s said further downgrades of the city’s rating are likely.
LaGrange is a small residential community in the Louisville-Jefferson County metropolitan statistical area. While the population has increased over the years, the city currently has 8,082 residents.
