Hillview, Ky., Returns to Investment Grade on Ch. 9 Settlement

BRADENTON, Fla. – Hillview, Ky.’s bond rating was returned to investment grade by Standard & Poor's based on the pending dismissal of the city’s Chapter 9 bankruptcy case.

The multi-notch upgrade, to BBB from B-minus on the city’s 2010 general obligation bonds, is based on a review of the legal settlement that Hillview has reached with top creditor Truck America Training LLC, S&P analyst Scott Nees said late Tuesday.

The settlement, announced March 30, is expected to result in dismissal of the bankruptcy petition Hillview filed in August, he said.

“With the case's dismissal, our immediate cause for concern is removed, and we accordingly believe a higher rating, reflecting our forward-looking view of the city's credit quality, is warranted,” he said.

S&P said it also revised the city’s credit outlook to stable. It had been on CreditWatch with negative implications

Even though the case is expected to be dismissed, S&P said Hillview could face headwinds in the next two fiscal years as it deals with the costs arising from the settlement, which includes additional debt and mandatory annual payments to Truck America.

Hillview filed for Chapter 9 owing Truck America $15.23 million from a court-ordered judgment it lost over a soured legal dispute involving a contract to purchase city land.

Hillview agreed to issue $5 million of GO bonds and use the proceeds to pay a portion of its obligation to Truck America, according to court documents filed earlier this month.

The city will also raise its occupational tax to 1.8% from the current rate of 1.5%, increase its insurance premium tax to 7% from 5%, and pay Truck America 8.3% of its “eligible revenue” each year for 20 years.

Eligible revenue equals gross general fund revenues minus agreed-upon deductions such as amounts necessary to pay debt service, $50,000 for an emergency reserve, and certain restricted grants.

“The BBB rating incorporates our uncertainty as to the city's ability to handle these costs, in conjunction with our concerns over a number of other vulnerabilities,” Nees said.

The vulnerabilities include the city's limited reserves and liquidity, high direct debt burden with annual carrying charges that will nearly double with the issuance of settlement bonds this year, elevated and rising pension costs, and the absence of formal and informal financial management policies.

The stable outlook reflects S&P’s view that the settlement “should be manageable” at the BBB rating.

“While we have emphasized our concerns regarding the pending settlement costs and their potential impact on the city's budget, we also note that Hillview's operating budget has been balanced for the past three audited fiscal years and the city has additional revenues coming in that should help offset the additional costs, factors which support a stable outlook,” Nees said.

Standard & Poor’s rated Hillview A-minus until February 2015, when it dropped the rating to junk because the city was discussing bankruptcy.

Hillview asked Bankruptcy Judge Alan C. Stout in late March to lift a stay so that the city and Truck America could resolve a lower court case.

A motion to dismiss the bankruptcy case had not been filed with the court at press time early Wednesday.

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