Standard & Poor's Ratings Services said it lowered its rating one notch, to CCC-minus from CCC, on Aliceville Governmental Utilities Services Corp. (GUSC), Ala.'s series 2011 bonds, issued for its Federal Bureau of Prisons (FBOP) project.
The rating remains on CreditWatch with negative implications.
"The current rating is based on a series of draws on the debt service reserve fund (DSRF) in August 2013 and again in February and August 2014, almost completely exhausting the fund," said Standard & Poor's credit analyst Theodore Chapman. "Absent certainty that sufficient funds will be with the trustee by the Feb. 1, 2015, payment date, we would likely lower the rating to no better than CC, then to D once a default has occurred."
Simply resolving the ongoing rate dispute between the GUSC and the FBOP - for which the corporation issued the bonds to fund the construction of water and sewer facilities for a federal correctional institute near the city of Aliceville - would not necessarily ensure enough money on hand to satisfy the upcoming payment of approximately $193,000. Even if ongoing revenues from operations would be enough to satisfy the Feb. 1, 2015, payment, the agency views the ability to make the Aug. 1, 2015 principal and interest payment as doubtful assuming the current cash flows of the project.
The GUSC has approximately $8.375 million in outstanding revenue bonds related to the FBOP project. Following the disclosed draw of $835,079.24 from the DSRF to make the August 2014 payment, the reserve fund has by Standard & Poor's calculation been nearly depleted and would be insufficient by itself to meet the Feb. 1, 2015, interest payment absent sufficient ongoing revenues, likely creating a default. The DSRF was originally funded with bond proceeds in the amount of maximum annual debt service, or $1.43 million. By Standard & Poor's calculation, the DSRF's current balance is less than $55,000.
Ongoing discussions could address both parties' concerns. However, the original projections assumed that ongoing cash from operations would be sufficient to cover all revenue requirements, including debt service, and that revenues plus the liquidation of the DSRF would be used to satisfy the final payment in 2021, not to cover revenue shortfalls that began in August 2013, followed by an additional draw in February 2014 as well as the most recent unplanned use of the DSRF. The trust indenture also establishes that the DSRF be replenished, but is silent on the maximum number of months by which the replenishment must be completed.
