Fitch Ratings Tuesday assigned a junk rating to debt issued for the Sonoma County Indian Health Project.

Fitch downgraded to BB from BBB-minus $5.54 million in certificates of participation issued in 1999 through the California Statewide Communities Development Authority.

Analysts said the COP rating was dropped because a federal agency isn’t directly transferring funds to the bond trustee as called for by the original terms of the debt issuance.

According to Fitch, its investment-grade rating was based on the expectation that there was a “lockbox” mechanism requiring the federal Indian Health Service to deposit payments directly to the bond trustee before releasing operating funds to Sonoma County Indian Health Project, a nonprofit with an “extremely small revenue base and narrow breadth of services,” analysts said.

Fitch recently determined that the Indian Health Service has not been making those direct payments to the trustee since at least 2002, though it notes that the nonprofit organization continued making regularly scheduled debt-service payments to the trustee, assured that all bond payments are current, and that its legal counsel is endeavoring to correct the situation.

Though Sonoma County Indian Health Project’s operating profitability and debt-service coverage declined between 2006 and 2009, according to Fitch, its operations “improved significantly” in 2010, when it generated a 3.3% operating margin.

The project was established in 1971 to provide health care for the Native American population of Sonoma County.

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