BRADENTON, Fla. - Standard & Poor's downgraded Hillview, Ky.'s general obligation bonds four notches to BB-plus Feb. 27, citing a potential $11.4 million damage assessment that could land the city in bankruptcy court.

The outlook is negative.

The junk rating for the city's 2010 GO refunding bonds reflects S&P's view of the city's fiscal 2014 audit in which the city's auditor expressed doubts regarding Hillview's ability to continue as a going concern, according to analyst Scott Nees.

"The circumstances reflect the unsuccessful appeal of a legal judgment where a jury determined that Hillview was in breach of contract, with damages of $11.4 million assessed against the city," Nees said.

Hillview had $960,713 in cash as of June 30, 2014.

S&P said city has filed a motion for a discretionary appeal with the state Supreme Court. The $11.4 million is accumulating interest at 12% per year, and is not covered by the city's insurance policy.

If the appeal is unsuccessful, "we understand that the city could elect to pay for the settlement through the issuance of long-term debt, though it could also file for bankruptcy, an option we understand it is considering," he said.

According to S&P, Hillview is actively consulting with a bankruptcy attorney to determine possible courses of action. Kentucky allows municipalities to petition for bankruptcy as a potential remedy to a settlement. A municipality must be insolvent to file for Chapter 9 bankruptcy.

City officials did not immediately respond to requests for comment. The audit was not available on the Municipal Securities Rulemaking Board's EMMA filing system.

S&P reviewed the city's credit in December 2013, and lowered the GO rating to A-minus from A. The outlook was revised to negative from stable largely due to concern about the pending appeal.

In 2012, the Bullitt County Circuit Court found that Hillview breached a land purchase contract with a local trucking school, and the city appealed. The Kentucky Court of Appeals affirmed the lower court decision in March 2014.

S&P maintained the negative outlook due to the potential for deterioration in credit quality that could accompany a Supreme Court decision against the city, the auditor's going concern opinion, and "management's inability to articulate a plan should Hillview be required to pay the settlement," Nees said.

"If the state Supreme Court sides against the city, subsequent rating action will depend largely on the city leadership's response," he said.

Hillview has a population of about 8,000. The city is in Bullitt County, which is in the Louisville-Jefferson County, Ky.-Ind. metropolitan area.

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