Wenatchee rebounds after defaults, enforcement actions
PHOENIX - Wenatchee, Wash. is investment grade again years after a default and subsequent landmark Securities and Exchange Commission enforcement action.
Moody's Investors Service announced Oct. 12 that it was raising the city’s issuer rating to A3 from Baa2 and the rating on the city's 2007 limited tax general obligation bonds to A3 from Ba1. The agency also adjusted Wenatchee’s outlook to positive from stable. The upgrade marks a new recovery point for the Chelan County city of roughly 35,000 which Moody’s had moved to junk territory in 2012.
The saga began back in 2006 when the city formed the Greater Wenatchee Regional Events Center Public Facilities District (PFD) to issue nearly $42 million of bond anticipation notes to construct an events center and ice hockey arena – debt the city agreed to back. The district defaulted on the debt in 2011 when neither the district nor the city had enough money to make a required interest payment. Moody’s downgraded the bonds to junk at that time, explaining that the default on the arena bonds constituted a default “on all parity obligations,” including the limited tax GOs.
The default was later cured and the BANs were refunded with refunding bonds secured by sales tax revenues. But Wenatchee’s troubles weren't over, as the SEC began probing the arena deal shortly after the default. In November 2013 the SEC brought an enforcement action against the facilities district, underwriter Piper Jaffray & Co. and its lead investment banker on the deal, the project’s developer, and several individuals involved in the transaction. The SEC found that official statement for the BANs wrongly stated there had been no independent reviews of the financial projections for the center, when an independent consultant had actually examined the projections twice and questioned the economic viability of the project. The OS also omitted other information not favorable to the project, the SEC alleged.
The district agreed to pay $20,000 to settle the charges, the first financial penalty the SEC had assessed against a municipal issuer. The upgrades now reflect a “turnaround” from those days, Moody’s said.
“The city's liability for PFD debt is limited to $200,000 per year until 2031, which is less than 1% of the city's general fund revenues,” Moody’s said. “The PFD remains self-sufficient using existing tax and other revenues, and has paid back more than 50% of the funds lent to the PFD from the city.”
The PFD has about $49 million of long-term debt outstanding according to a financial statement released in May, about $4 million of which is a non-interest bearing, limited obligation note to the City of Wenatchee.
“The positive outlook reflects the expectation that the city's performance will continue to demonstrate a willingness to pay debt service,” Moody’s said. “Additionally, the outlook incorporates the view that the general credit profile will continue to improve as the city moves past its 2012 default.”
Wenatchee Mayor Frank Kuntz, who had been in office only a couple of months when the default and subsequent SEC investigation hit, said he was gratified that Moody's recognized the work the city has put in shoring up its financial position.
"From a financial perspective we’re in really good shape,” said Kuntz, adding that Wenatchee will be in the market again in the next year or so. "We've made it through it, and we're a better, stronger community for it."