SAN FRANCISCO - The top finance official in Mammoth Lakes, Calif., says there is no chance the resort community will fail to redeem $2 million in notes at the end of the month, despite a Standard & Poor's ratings action casting doubt on its ability to do so.
The agency Tuesday dropped the rating on Mammoth Lake's Series 2008 capital project notes to SP-3, its lowest short-term rating, from SP-1-plus, its highest. At the same time Standard & Poor's downgraded about $5 million in outstanding certificates of participation to a speculative BB from A-minus, while assigning a developing outlook.
The town had been planning to roll over the notes, which mature June 30, with either long-term bonds or another note issue.
Its ability to do so is doubtful, according to Standard & Poor's, because in April 2008 Mammoth Lakes lost a court case brought by a developer, with the local superior court ordering a $30 million judgment. The case and the award are on appeal, with no hearing scheduled.
"We believe Mammoth Lakes' capacity to successfully issue bonds depends on market access that we judge to be speculative, in part due to the pending resolution to litigation that could potentially result in a $30 million liability owed by the town," Standard & Poor's credit analyst Sussan Corson said in a news release.
The town will redeem the notes on schedule, according to finance director Brad Koehn, even though the ratings downgrades ensured there will be no market access.
"I could pay it today and have no worries," he said. "What's surprising is that there was never a concern on my part or expressed on the part of Standard & Poor's that there was any doubt that we would pay our bonds, particularly this note due June 30."
The town can afford to redeem the capital notes even if it can't roll them over in the debt markets, Koehn said.
Standard & Poor's was aware of the judgment when it issued its initial SP1-plus note rating in October. Its analysis this week cited as a factor in the downgrade discussions of bankruptcy said to have occurred in reaction to the town's legal liability.
"The town is not exploring bankruptcy," Koehn said.
The town's leaders are highly confident they will prevail on appeal and if for some reason the town must pay, the town would issue a judgment bond, he said.
In April, the town council adopted a resolution opposing a bill active in the state Legislature that would require local agencies to get state approval before filing for municipal bankruptcy. If the town is unsuccessful in court, "Mammoth Lakes might need municipal bankruptcy procedures in order to maintain critical services and address its creditors in an orderly way," town manager Robert Clark wrote in his staff report.
Bankruptcy came up in public discussions as a possible scenario if "for some odd reason" it proved impossible to issue a judgment bond, Koehn said.
"That's just not where we anticipate going," he added.
Mammoth Lakes is a resort community of about 7,400. It's probably best known for the Mammoth Mountain ski area, which traditionally catered to residents of the Los Angeles area who make the five- or six-hour drive.
Both the lawsuit and the capital notes stem from community leaders' long drive to obtain commercial air service to broaden that market.
The suit was filed by a developer who contracted with the city in the 1990s to develop the airport and surrounding property in a way that would benefit from passenger air service.
Efforts to get service on mainline jets foundered as Mammoth Lakes was unable to obtain environmental clearances to lengthen the runway.
The developers' breach-of-contract suit argued that the city was responsible. The town's leaders argue the judge and the trial jury ignored contract language that protected the town from the consequences of federal actions beyond its control.
The town government issued the capital notes to refurbish a building to use as a terminal for the smaller-scale passenger service it eventually secured, starting last winter with one daily seasonal flight on a turboprop plane.