Moody’s Investors Service Monday downgraded $4.9 million of Compton, Calif., sewer revenue bonds five notches to Ba1 from A2 due to the city’s severe cash crisis.
“The downgrade is based primarily on the city’s severe liquidity crisis, the risk this raises that the city could seek bankruptcy protection, and the potential implications of such a development on timely debt service payments,” Moody’ said in report.
The rating agency said the city’s sewer enterprise makes enough money to cover debt service payments, “assuming revenue have been allocated as legally required.”
Standard & Poor’s placed the city’s BB rating and underlying rating on its lease revenue bonds on watch for a possible downgrade earlier this month. It also lowered its rating on Compton’s sewer bonds and water revenue bonds to BBB-minus from A.
S&P analysts said the negative CreditWatch listing came after the city’s auditor, Mayer Hoffman McCann PC, refused to give an opinion on Compton’s 2011 comprehensive annual financial report.
“The independent auditor wrote that due to allegations of waste, fraud and abuse of public moneys, as well as a lack of city responses to the auditors’ inquiries, that the scope of their work did not enable them to express an opinion,” Standard & Poor’s said in the report released last Friday.
Without an audited report, banks have refused to make loans to the city to help it cover its short-term cash flow problems.
Compton’s newly hired city manager Harold Duffey said this week that the city would not be filing for bankruptcy and should be able to pay its bills through the end of the year, but would ask for an independent audit to end talk of fraud, according to the Los Angeles Times.
The city’s elected treasurer has said Compton is facing serious cash-flow problems due to an Aug. 1 deadline for bond payments and the unavailable lines of credit.
Compton officials have 90 days to produce an audited report for Standard & Poor’s before it takes the possible action of withdrawing or suspending its rating on the city.
City officials have said the loss of the rating could trigger a default. Compton has around $275 million of outstanding bonds.