Moody's Investors Service said it has downgraded to Ba1 from A2 the underlying rating on the city of Compton, Calif., sewer revenue refunding bonds, Series 1998.
The rating remains on review for downgrade.
The downgrade is based primarily on the city's severe liquidity crisis, the risk this raises that the city could seek bankruptcy protection, and the potential implications of such a development on timely debt service payments.
The sewer enterprise currently generates more than sufficient net revenues to make debt service payments, and the Ba1 rating reflects the expectation of full, if not timely, debt service payment, assuming revenues have been allocated as legally required.
The downgrade also reflects the city's weak internal controls and management practices, highlighted by the depth of the liquidity crisis; recent, severe general fund overspending relative to budgeted amounts; and allegations of waste, fraud and abuse of public monies by the city's mayor.
These allegations undermine the expectation that the city will properly account for and transfer pledged enterprise revenues to bond trustees consistent with trust agreements to ensure timely debt service payments.
Uncertainty also derives from the city's inability to produce audited financial information on a timely basis.
The 1998 bonds were originally insured by MBIA and are now reinsured by National Public Finance Guarantee. The bonds also benefit from a cash funded debt service reserve held by the trustee.