The bankruptcy filing of Central Falls, R.I., created another ripple Thursday, one day after the city’s Chapter 9 case opened in downtown Providence.

Moody’s Investors Service placed the Ba1 rating assigned to a bond issue sold by the Rhode Island Health and Educational Building Corp. under review for possible downgrade, affecting $17.2 million in outstanding debt.

Central Falls is among the pool of participating communities and school systems in RIHEBC, a quasi-public agency that provides nonprofit educational and health care providers with access to financing for capital projects through the sale of tax-exempt bonds. Founded in 1966, it is one of 21 such agencies in the state.

Moody’s said corporation’s Series 2007B public schools financing program revenue bonds use a pooled financing rating that incorporates Central Falls’ low Caa1 general obligation rating, which analysts have red-flagged for possibly a further downgrade.

The RIHEBC bonds are secured solely by the loan payments from the pool’s borrowers under their respective financing agreements. Central Falls is a 6.6% participant, while the towns of Tiverton, with54.2%, and North Kingstown, at 35.5%, are the biggest participants.

“The general funds of RIHEBC are not pledged to any bonds, nor is the state of Rhode Island obligated in any form,” Moody’s said.

The agency added that uncertainty over the timing and outcome of bankruptcy proceedings increases the risk of nonpayment to RIHEBC by Central Falls, although attorneys and the judge in the case have said they hope to resolve the matter within six months.

Rhode Island lawmakers and other officials have worried about contagion, or the spread of financial blight within the state, since Central Falls’ problems intensified. The city has been under state receivership since May 2010.

On Wednesday, as the bankruptcy case began, the attorney for receiver Robert Flanders said financial woes reached a tipping point.

“If we don’t make the changes so that we have a truly balanced budget, we will drive off the fiscal cliff,” said Theodore Orson, a co-founder of Orson and Brusini Ltd. in Providence.

Central Falls filed for Chapter 9 protection on Monday in the U.S. Bankruptcy Court for the District of Rhode Island in Providence. The city, which takes up about one square mile and whose population is 18,683, has an unfunded pension liability of $80 million.

According to the filing, bondholders carrying $20.8 million of the city’s general obligation debt will benefit from a first lien on ad valorem taxes and the city’s general funds, due to a state law passed in June.

Flanders, who two weeks ago asked retirees to voluntarily cut their pensions, has petitioned bankruptcy Judge Frank Bailey to cut pension costs in half.

Without a solution, Orson said, “We will have no money to pay pensions and we’ll do like they did in Pritchard, Alabama. We’ll just go and say to them, we’ve got no money and we won’t pay.”

Last year, Pritchard, with a population around 28,000, stopped paying benefits to retired town employes, and some of them, if capable, have returned to work.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.