LOS ANGELES — Moody's Investors Service confirmed its A3 rating for Marysville, Calif.'s $12.7 million in sewer revenue bonds Monday following the completion of a review for downgrade.
The sewer bonds, issued by the Marysville Public Financing Authority, were placed on review in November 2014 in conjunction with a report that downgraded other of the city's bonds following the failure of a local ballot measure.
The city's issuer rating, or implied unlimited tax GO rating, and general fund-backed lease rating were downgraded in November to Baa1 and Ba3, respectively, with a negative outlook.
"The review was initiated based on our view that the enterprise was exposed to the city's financial challenges," Moody's analysts Moses Kopmar and Alexandra Cimmiyotti said in a March 9 report.
Marysville, population 12,000, is 40 miles north of Sacramento. The sewer enterprise provides wastewater collection and conveyance for 5,300 accounts within the city.
Analysts ticked off several reasons for the review including the credit's pooled cash arrangement, history of narrow operating margins and very limited to no liquidity maintained in the enterprise, analysts said. Other concerns mentioned were the limited progress the enterprise had made in terms of strengthening its balance sheet versus Moody's prior expectations and the potential that the current drought environment might additionally pressure operations.
The A3 rating reflects Moody's view of the sewer enterprise's stable, but small service area with limited growth potential, satisfactory debt service coverage and improving liquidity, analysts said. It also reflects the rate structure consisting substantially of fixed charges that affords both revenue predictability and protection from conservation-related volume declines, and stable sewer flows with healthy capacity in a nearby treatment plant, analysts said.
"Outlooks are usually not assigned to local governments with this amount of debt outstanding," Moody's wrote.
"The projects are already funded and future capital needs should otherwise be manageable and more easily identifiable over a longer term planning horizon, given the limited complexity of operations once the transition is complete," analysts said.
The enterprise issued $13.1 million of bonds in 2012 to decommission its treatment plant and stabilization ponds, construct a 2.7 mile transmission pipeline to the Linda County Water District treatment plant, and to pay for the related capacity expansion and treatment plant improvements.
The contract for the plant decommissioning has been awarded and the pipeline is out for bid. Both are expected to be completed in late 2015 or early 2016.
The rating could be upgraded if debt service coverage and liquidity improve and metrics are sustained at stronger levels for consecutive years; or it could be downgraded if debt service coverage and liquidity worsen materially or if the financial profile of Marysville deteriorates further.
The bonds are secured by a prior lien on the net revenues of the city's sewer enterprise. The system has additional long-term capital obligations of $11.6 million and $670,000, to the Linda County Water District and the State Water Resources Control Board, respectively. These obligations are structurally senior to the system's revenue bonds.
"While we do not expect a bankruptcy filing by the city, in our base case, a filing does constitute an event of default under the installment sale agreement that governs the sewer revenue bonds," analysts said. "A restructuring of the COPs, which the city had mentioned as a potential alternative, could possibly be interpreted as an event of default."
While acceleration of the sewer bonds is a legal remedy, Assured Guaranty has control rights and the ultimate power to direct acceleration or not, analysts said.
