CHICAGO — Standard & Poor’s late last week downgraded to D from CC its rating on $39 million of appropriation-backed bonds issued by the Moberly, Mo., Industrial Development Authority in 2010 to help fund construction of a now-abandoned artificial sweetener plant.

Standard & Poor’s also removed the bonds from CreditWatch with negative implications, where it was placed last September when the city defaulted on its appropriation pledge, forcing the trustee UMB Bank to dip into reserves to cover a Sept. 1 payment.

The rating agency’s latest action was triggered by the trustee’s decision amid mounting legal and other bills not to tap reserves to cover the March 1 payment. UMB currently holds $1.8 million in a reserve fund and another $2 million in unused bond proceeds.

“Standard & Poor’s understands that the trustee will maintain these funds as further developments unfold regarding the failed Mamtek sucralose manufacturing plant project. Furthermore, the city of Moberly has indicated that it does not intend to appropriate any of its own funds to pay debt service on the Series 2010A, 2010B, and 2010C bonds,” the agency wrote.

“Standard & Poor’s understands that the project remains incomplete and that there are currently no material developments regarding a new user for the project site,” the agency added.

An investor who holds a small chunk of the bonds filed a lawsuit last week accusing underwriter Morgan Keegan & Co. and underwriter’s counsel Armstrong Teasdale LLP of providing false and misleading information in the offering statement. The firms deny the charges and said they will vigorously challenge them.

The complaint accuses the firms of failing their fiduciary responsibilities to engage “in proper due-diligence review of organization, operations and financial condition of Mamtek” and making false and misleading statements that were material to the company’s and project’s viability.

The downgrade to the D level marks the latest development in a case that has raised the ire of bondholders, various regulators, and Missouri lawmakers over the abandoned, half-finished plant built by Chinese-based Mamtek US Inc. in Moberly.

The authority issued the bonds backed with the city’s appropriation pledge. The company last August defaulted on a payment to Moberly needed for debt service and the city in turn last fall informed the trustee it wouldn’t honor its pledge to repay the debt. Mamtek then abandoned the half-built factory.

Moberly lost its investment-grade rating from Standard & Poor’s after it declined to make good on its appropriation pledge. It is now rated B. The project bonds were rated A-minus when issued in 2010, one notch below the city’s issuer credit rating at the time.

Local, state, and federal regulators are probing the project, state lawmakers have held hearings and introduced legislation that would tighten restrictions on local economic development bonds, and the trustee has filed a lawsuit against Mamtek alleging fraud.

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