Moody's Investors Service said it has downgraded to Baa2 from Baa1 the underlying rating of the New Orleans Sewerage and Water Board, La.'s $160.9 million in outstanding sewer revenue bonds.

Concurrently Moody's affirms the negative outlook associate with the credit.

Bonds are secured by a gross pledge of revenues received from the imposition of sewerage rates.

The rating downgrade reflects weak financial performance and reserve levels with substantial borrowing expected in the near to medium term to satisfy an EPA Consent Decree.

The rating also reflects adequate legal provisions for outstanding debt, a relatively stable customer base, and adequate debt service coverage. The rating incorporates a recent significant rate increase that has yet to have a positive impact on the system's finances.

Affirmation of the negative outlook reflects the challenges the system will have in the near term to accommodate significant borrowing needs, stabilizing financial margins, and restoring satisfactory cash balances.

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