Standard & Poor's Ratings Services said it lowered its rating on Hillview, Ky.'s series 2010 general obligation refunding bonds four notches to BB-plus from A-minus.
The outlook is negative.
"The downgrade to BB-plus reflects, in part, our view of the going concern opinion in the fiscal 2014 audit, in which the city's auditor expressed doubts regarding Hillview's ability to continue as a going concern," said Standard & Poor's credit analyst Scott Nees.
The circumstances reflect the unsuccessful appeal of a legal judgment where a jury determined that Hillview was in breach of contract, with damages of $11.4 million assessed against the city.
S&P previously reviewed the city's bond rating in December 2013, at which time it lowered the rating one notch and revised the outlook to negative from stable, largely on concerns about the potential settlement and the status of the city's then-pending appeal.
Subsequently, in March 2014, the state of Kentucky Court of Appeals delivered a decision affirming the Bullitt County Circuit Court's prior decision dating back to 2012 that the city breached a land purchase contract with a local trucking school.
The city has filed a motion for a discretionary appeal with the state supreme court, which can choose to hear the case at any time. No further proceedings have yet been announced. The $11.4 million is currently accumulating interest at 12% per year and is not covered by the city's insurance policy. The city's cash totaled $960,713 at the conclusion of the most recent fiscal year (June 30, 2014).
"The negative outlook reflects our view of the potential for the deterioration in credit quality that could accompany a court decision against the city, the auditor's going concern opinion in the city's most recent audit report, and management's inability to articulate a plan should Hillview be required to pay the settlement," said Nees.
