Standard & Poor's Ratings Services said it placed on CreditWatch with negative implications its BB rating on Hercules Public Financing Authority, Calif.'s series 2010 electric system project revenue bonds, series 2010 electric system project revenue refunding bonds, series 2003B lease revenue bonds, and series 2009 taxable lease revenue bonds (issued for the Bio-Rad Project), issued for the city of Hercules.
"The CreditWatch placement reflects our uncertainty surrounding the city's willingness to pay its obligations after the city's statements in a Sept. 25, 2012 material event notice," said Standard & Poor's credit analyst Sussan Corson.
While the series 2010 bonds' debt service payments are secured by a city covenant to advance available funds in the general fund as well as net electric system revenue, the city states in the material event notice that "The city does not anticipate there will any available funds to make such advances in the foreseeable future and does not expect to make any such advances."
As part of the series 2010 revenue bonds and series 2010 revenue refunding bonds issuances, the city had entered into a cooperation agreement with the Hercules Public Financing Authority. Pursuant to the cooperation agreement, the city's covenant to make the necessary payment to the authority no later than five days prior to the bond payment date is an absolute obligation, not subject to deduction or offset of any kind.
The cooperation agreement requires the city to amend the general fund budget, if necessary, to make the appropriations to cover the lease payments.
If S&P determines that the city's willingness to pay is in question, it could lower the ratings multiple notches. S&P expects to resolve the CreditWatch status before the end of October.