Moody’s Investors Service on Friday downgraded Texas’ Brazosport College District revenue bonds to A2 from A1 while Standard & Poor’s lowered the outlook on its AA-minus rating to negative from stable.
The Moody’s downgrade affects $6.8 million of revenue bonds issued in 2006. The outlook returned to stable.
“The downgrade reflects the college’s significant increase in leverage due to the issuance of tax-backed debt and use of reserves with limited prospects to replenish the balance sheet due to operating deficits,” wrote Moody’s lead analyst Faiza Mawjee. “The rating action also incorporates past contraction of the tax base, which is highly concentrated in the petrochemical industry.”
Debt for the district near Houston increased 77% between fiscal years 2010 and 2011 while financial reserves declined. That resulted in coverage of expendable financial resources to debt of 0.13 times and an “extremely high debt to revenue of 1.93 times,” according to Moody’s.
After the issuance of $11.8 million in October 2011, the cushion fell further to 0.11 and debt to revenue increased to 2.28 times.
“The negative outlook reflects our view of the significant decline in unrestricted net assets in fiscal 2011 and negative operating performance on a full-accrual basis,” S&P credit analyst Sarah Smaardyk wrote in the Sept. 7 report. “Although management reports that the decline was a one-time occurrence, we believe that operations will remain weakened and that unrestricted net assets will likely not return to historical levels.”
Smaardyk also noted flat enrollment and a potential decline in state appropriations add further credit risk during the outlook period. The district has 2,600 students and also receives funding from the county and the state.