CHICAGO - Moody's Investors Service returned Vadnais Heights, Minn.'s general obligation bond rating to investment grade, reflecting the city's resolution of a bond default that followed the city's failure to honor its lease commitment on a sports complex.

Moody's upgraded Vadnais Heights to Baa2, two levels into investment grade territory, from Ba1, on Wednesday.

The action impacts $1.1 million of rated GO tax increment and improvement bonds from a 2004 issue. The bonds also benefits from a separate, dedicated unlimited tax levy. The city has a total of $8.2 million of GOs. The outlook is stable.

The city of 12,000 located outside St. Paul sold the bonds in 2010 through its economic development authority to finance construction of the complex. The bonds were supported by a master lease agreement and repaid with those lease payments.

As the complex struggled, the city subsidized debt service, but the council decided in 2012 it could no longer afford the assistance and cancelled its lease and aid, arguing it was simply exercising its legal rights under the lease agreement.

The decision to renege on the lease, which eventually resulted in a bond default, prompted Moody's and Standard & Poor's to strip the city of its investment GO ratings. Moody's previously had rated the city Aa2.

The city eventually terminated the lease and relinquished its rights to the complex. Trustee US Bank NA finalized a deal to sell the property - despite some bondholders' protests - to Ramsey County this spring.

The current rating level "reflects diminished risks following the cure of a recent debt default after the city's termination of a lease agreement" on the bonds, Moody's wrote.

The county purchased the facility for $10.55 million, which could translate to a 45% recovery rate for holders of the $24.8 million of senior lien bondholders and 0% for holders of the $2 million of junior lien noteholders.

While winning back its investment grade, the city continues to suffer credit fallout for its action as Moody's limited the upgrade to reflect the city's "unwillingness to meet the lease obligation, resulting in a low recovery rate for lease revenue bondholders."

The rating reflects the elimination of the contingent liability with the sale of project assets, the moderate risk associated with a pending lawsuit brought by the complex's operator, and city's strong GO credit fundamentals that include sound general fund operations, low debt, and a stable economy.

"The stable outlook reflects our expectation that the city's General Fund operations will remain strong, that the city will be able to absorb potential pressures related to the pending litigation, and that the city will continue to honor its commitment to existing obligations," Moody's added.

A Ramsey County judge cleared the way for the sale to the county at the request of the trustee in April, rejecting the efforts of a group of the bondholders who sought to block the sale in hopes of recouping more of their investment through the continued operation of the facility. Attorneys for the trustee countered that the sale was in the best interest of bondholders.

The trustee held a bondholder call Wednesday to update bondholders on the distribution of sale proceeds as the trustee is awaiting court approval to distribute the sale proceeds. An initial distribution will be made "as soon as practicable after the court authorizes the trustee to disburse sale proceeds."

A final distribution will follow the conclusion of all trust administration activities or 30 days after the distribution order becomes final. Conquest Development Corp. is seeking $446,000 in proceeds held by the Trustee.

Standard & Poor’s rates the city B with a stable outlook.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.