CHICAGO – The Indiana school bond intercept program’s AA-plus rating won affirmation from S&P Global Ratings Tuesday in recognition of legislative changes that resolved the agency's concerns that the program would not prevent a default.
S&P affirmed the Indiana School Corp.’s rating, removed it from CreditWatch, and assigned a stable outlook. The program provides credit enhancement for 260 school districts.
“In our view, the revised statute better defines and establishes a process for administering an intercept of state aid in a manner that is more likely to result in full and timely payment of debt service,” S&P said. “We believe that the statute more clearly defines the state aid that is available to be intercepted, while also expanding on the availability of state aid that can be intercepted.”
The legislation included language that obligates the treasurer to intercept and advance any state aid that has been appropriated and allocated for distribution in the current state fiscal year, yet remains undisbursed, to the debt claimant within five business days of a notice of non-payment, S&P said.
The rating is set one notch below the state's issuer credit rating, on par with the state appropriation rating, due the requirement that an appropriation must be in place for the intercept mechanism to work at all times.
The rating agency placed the rating on CreditWatch with negative implications in February after learning in a routine portfolio review that the program’s administration, overseen by the state treasurer, worked differently from the way the agency had understood.
"On that basis … we believe there is uncertainty that intercept payments will always be made available to ensure timely payment of debt service in full,” analysts said at the time.
The program does not serve as state guarantee of school bonds. Its strengths lie in the intercept mechanism that gives debt service a priority position above other costs which may be paid out of a school corporation's general fund.
The concerns stemmed from the reporting timeline between a district’s default on lease payments needed to cover debt service and how quickly the treasurer would act to avert an actual bond default. A second concern stemmed from the allocation of intercepted state aid funds and whether they could sufficiently cure a looming default.
To meet S&P’s criteria, the legislation puts into statute the timeframe by which the treasurer will pay the unpaid debt service obligations from state funds: within five days upon being notified of a school corporation's failure to pay debt service obligations when due.
The legislation also expands the pools of funds that can be drawn from to fully cover an obligation. Previously, the state could draw only the amount that the district was set to receive under its monthly allocation, which is tied to an enrollment-based formula. That amount could fall short of what was needed to cover the obligation, allowing a default to occur. Ongoing monthly aid payments would then go to cover the default until cured.
Gov. Eric Holcomb signed the legislation last month.
“I am grateful, with new legislation and the work of my office, we were able to avoid a downgrade that would have impacted 260 schools in Indiana,” state treasurer Kelly Mitchell said in a statement. The office’s counsel Barnes & Thornburg LLP helped draft the legislation.
Moody’s Investors Service rates two districts that use the program.
Moody’s is reviewing Lake Central Multi-District SBC’s rating on $153 million of debt for a possible upgrade. The district carries an underlying rating of A3 that is boosted by one level to A2 through participation in the intercept program.
Moody’s did not change the rating on $166 million of Indianapolis Public Schools debt because it’s already at the cap of two notches below the state’s Aaa.