Collingswood, N.J., Mayor James Maley late last month compared the junk bond rating assigned to his city to a gigantic nose pimple, because it “doesn’t really affect how you operate, but it makes you look really bad.”
The community of 14,000 had a healthier complexion Thursday after Moody’s Investors Service upgraded it to Baa3, removing it from below-investment-grade status at Ba1.
The agency in September had dropped the rating six notches from A1, based on its belief that the borough would be challenged to make payments on debt it guaranteed to help finance development of condominiums.
The downgrade had angered Maley, who said Moody’s analysis was flawed and that his town didn’t deserve a junk rating.
Moody’s said the upgrade stems from Collingswood’s successful refinancing through the issuance of bond anticipation notes of a portion of a bank loan it guaranteed for the condo project.
“They have significantly reduced their risk by issuing the Bans. They moved it from a debt structure that had high uncertainty to one that is more typical of the municipal market,” said Moody’s analyst Julie Beglin.
The borough had guaranteed $4.5 million of LumberYard Redevelopment LLC’s $8.5 million loan taken out in 2006 to finance construction of condos. After the housing bust, many of the condos remained unsold.
Collingswood recently issued $5.1 million of one-year Bans to finance the purchase of condos at Lumberyard and to satisfy its guaranty.
“So the overall financial risk of the town is mitigated, but is still high, which is why they’re at Baa3,” Beglin said.
She added that Collingswood’s debt service obligation is very high for a municipality of its size and is expected to rise in the future.
According to the Moody’s report, the borough’s annual debt service is 16.6% of its expenditures.
Among its strengths, the report listed an adequate financial position and above-average wealth levels.
“We’re happy to have an appropriate rating again, but it was a frustrating and unnecessary roadblock,” Maley said in a statement.
Since the downgrade to junk status, Maley has expressed his frustration, saying Moody’s made factual and analytical errors, including misstating the guaranty amount at $8.5 million instead of $4.5 million.
“We just kept moving along as scheduled and Moody’s had to come to the realization that we are not, and never were, at any risk that would justify junk-bond status,” Maley said.
Beglin said Friday that the rating agency had corrected the guaranty amount in subsequent reports and had fully considered the lower amount, concluding that it was still very risky and expensive for the town.
Maley said he had been confident Collingswood’s rating would return to investment grade.