Moody's Investors Service has downgraded Cottonwood Municipal Property Corporation Water Enterprise, Ariz., senior lien debt obligation to Baa2 from Baa1, affecting $31.8 million in outstanding debt.

The bonds are secured by the lease purchase payments made by the city from net water utility system revenues. Concurrently, the rating is placed on review for downgrade.

The Baa2 rating reflects the system's narrowing financial position that caused by the unwillingness to raise rates sufficient to meet the 1.35 times rate covenant and pressures from rising expenses. The rating also considers the essentiality of the service, stable customer base, and satisfactory legal provisions.

The rating is placed on review for downgrade given the uncertainty surrounding management's plan to implement rate increase pending approval of City Council.

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