S&P Global Ratings said it has lowered its general obligation rating on the city of Petersburg, Va. three notches to BB from BBB.
At the same time, due to the city's participation in governmental agreements to provide for debt service payments, it also lowered its underlying rating on the Stafford County & Staunton Industrial Development Authority's Municipal League-Virginia Association of Counties Finance Recovery Act Bond Pool II (of which Petersburg is a participant) three notches to BB from BBB.
The agency placed the long-term ratings on CreditWatch with negative implications.
"The downgrade reflects our view that the city has very weak liquidity, based on what we believe is now limited market access to external liquidity," said S&P credit analyst Timothy Little. The city's failure to secure financing for its annual tax anticipation note during the beginning of the fiscal year underscores its diminished market access.
"The BB rating indicates that the city faces major ongoing uncertainties regarding financial conditions, which could lead to inadequate capacity to meet its financial commitments," he added.
The current long-term rating is constrained by the agency's view of the city's very weak liquidity based on diminished market access, weak management conditions that resulted from an ongoing structural imbalance with no credible long-term plan in place to restore fiscal solvency, and very weak flexibility with available reserves less than negative 5% of general fund expenditures.
Petersburg, with an estimated population of 32,899, is 25 miles south of Richmond on Interstate 95, encompassing about 23 square miles in Petersburg City (Dinwiddie County/Colonial Heights/Petersburg combined area).
"The CreditWatch Negative reflects uncertainty as to whether the city can resolve its near-term liquidity concerns," added Little. Obtaining market access could be a key to improved liquidity.
The city is actively managing its cash flows to have the ability to meet its obligations based on timing of property tax collections, timing of payments, and other cash flow management practices, the agency said. However, it faces major ongoing uncertainties regarding financial conditions, which could lead to inadequate capacity to meet its financial commitments.
Within the next 90 days, the city should be able to provide updated information on its ability to obtain short-term financing and close its fiscal 2017 budget gap of $12 million. The city has upcoming payments on bonded indebtedness which should be made, based on current cash on hand and upcoming receipt of quarterly property tax collections due before Sept. 30 and Dec.31.
If the city can obtain short-term liquidity, resolving current cash concerns, and mitigating its $12 million budget gap, the agency may affirm the rating and resolve the CreditWatch.
If interim financing is achieved but proposed budgetary reforms appear to be insufficient for the current year, it may lower the rating. However, if current-year budgetary action is insufficient or interim financing is not achieved with cash flow suggesting continued liquidity strain that could impair payment on its obligations, the agency said it would likely lower the rating by several notches.
