DALLAS — Moody's Investors Service has extended its watch list period for a possible downgrade of the New Mexico Finance Authority as the agency continues to investigate a phony audit that brought its bond issuance to a halt in July.
Moody's rates the NMFA's senior-lien debt Aa1 and its junior-lien bonds Aa2.
Standard & Poor's rates the agency's senior-lien debt triple-A and also has the NMFA bonds on negative ratings watch.
The New Mexico State Auditor has hired PricewaterhouseCoopers to carry out a forensic audit that is expected to be completed by mid-November. The agency has also hired REDW LLC to complete the fiscal 2011 and fiscal 2012 audits. The fiscal 2011 audit is expected to be completed in early spring 2013, followed shortly by the fiscal 2012 audit.
"Extension of the review for possible downgrade is driven by the estimated timing of completion for the forensic audit which is beyond the usual 90 day watch list window but is expected in the near term," Moody's analysts wrote. "Resolution of the watch list will consider completion and results of the forensic audit, efforts by NMFA to establish more stringent internal controls, and progress towards completion of the fiscal 2011 and fiscal 2012 audits."
The ratings review action does not affect transportation revenue bonds issued by the authority on behalf of the New Mexico Department of Transportation or cigarette tax revenue bonds.
NMFA delayed July's planned sale of $40.4 million of senior-lien revolving fund bonds after the agency's fiscal 2011 audit was determined to be a fake. An earlier bond issue in March had relied on the audit in its official statement before the deception was discovered.
When state officials reported that the audit could not be verified, Moody's and Standard & Poor's placed the NMFA's ratings under review for possible downgrade in mid-July. A downgrade would affect about $1.7 billion of outstanding NMFA debt.
"The discovery that the audit was not actually audited but was presented as such on the Authority's website and in the most recent bond offering document indicates NMFA had weak internal controls over financial reporting which may not be consistent with the current ratings," Moody's noted in its Wednesday statement.
Former NMFA controller Gregory M. Campbell was indicted in September on charges of submitting a forged audit for the fiscal year 2011 and circulating that audit to bond investors.
A presentation was made to the same grand jury regarding John Duff, Campbell's former supervisor and chief operating officer for the New Mexico Finance Authority, but the grand jury declined to indict Duff.