CHICAGO – St. Louis was downgraded ahead of a $25 million general obligation sale later this month.
Moody's Investors Service dropped the city's GO rating to A2 from A1 and warned further action could loom by assigning a negative outlook. The rating agency had previously downgraded the city to the A1 level last year citing its fiscal challenges and the application of revised criteria.
The action impacts the upcoming sale and $9.1 million of parity debt. The rating agency also downgraded to A3 from A2 its rating on the St. Louis Municipal Corp.'s $173 million of lease revenue debt for essential purposes. The corporation's $53 million of leave revenue debt for non-essential purposes was dropped to Baa1 from A3. The lease ratings reflect the pledged assets and the annual appropriation risk.
"The A2 GO rating reflects the city's weak reserve and liquidity position, reliance on economically sensitive revenues and below average wealth levels," Moody's wrote. "The rating further incorporates the large tax base that serves as a regional economic center coupled with improving economic development activity."
Analysts said the negative outlook reflects concerns that the city's financial position is at risk for further deterioration absent significant additional revenue growth or spending cuts and its reserve position is likely to decline significantly in 2017 due to payroll issues.
"Future reviews will focus on management's ability to balance the budget and generate sufficient revenues to improve the balance sheet," analysts wrote.
Proceeds of the sale will fund the purchase of fire-fighting equipment, a refuse truck, finance the update of computer hardware and software, provide matching share funds to repair and renovate bridges, and to renovate recreation centers, and city-owned buildings.
Fitch Ratings in June hit the city hard with a three notch downgrade of its issuer default and Municipal Finance Corp. ratings due to negative trends and the rating agency's application of new criteria in assessing tax-supported debt. Fitch rates the city's issuer default rating to A-minus and its MCF rating BBB-plus.
City comptroller Darlene Green outlined in a news release the action taken by Moody’s Investors Service and S&P Global Ratings’ affirmation of the city’s A-plus rating. S&P Global viewed the city's strong fiscal management, adequate budget performance, and very strong liquidity as positive factors for reaffirming the A+ credit rating, Green wrote. Moody's on the other hand, views the city's liquidity as weak and a contributing factor to the downgrade. Moody's also viewed management's adoption of a 10 year financial plan and taking steps to implement recommendations as a move in the right direction, she added. "The city's strong fiscal management team has implemented a financial strategy to grow its reserves and diversify and increase its revenues,” Green said, adding that all three rating agencies maintain A level ratings.
