CHICAGO – Rolette County, North Dakota lost its investment grade issuer rating as its balance sheet faces strains from lease debt for a new jail and a drop in oil production revenues.

Moody’s Investors Service on Wednesday lowered the county’s issuer rating to Ba1 from A3 and assigned a negative outlook.

The downgrade reflects “the county's small tax base; weak resident income indices; limited liquidity; recent decline in revenues tied to oil production; elevated debt burden; and a substantial increase in fixed costs associated with upcoming lease payments,” Moody’s wrote. Lower prices have a taken a toll on oil production in the state.

The county’s $9.6 million of debt is structured as lease-backed revenue bonds which are notched two levels off the issue rating, bringing their rating to Ba3.

The lease rating is two levels lower “due to the risk of annual non-appropriation of lease payments, which will be funded in part with new revenue sources that have not yet been generated; the more essential nature of the pledged assets (the county's new jail); and the risks associated with operating the new jail facility, which will open in early 2018,” Moody’s said.

North Dakota Oil Pump Jack Fracking Crude Extraction Machine
A North Dakota oil rig. Declining oil production revenue was a factor in Rolette County's downgrade.

The county has enacted a capital projects levy, which is the only dedicated revenue source for the lease payments with expected revenues covering about 38% of the $526,731 due in fiscal 2018. The county will cover the remainder with a portion of its general fund levy, tax revenues from windmills and revenue generated from renting out beds to local jurisdictions.

The negative outlook stems from operating pressures posed by the new jail, a material increase in fixed costs associated with the lease payments for the new jail, and ongoing declines in oil production revenues.

Factors in the county’s favor include its growing tax base, moderate unfunded pension liabilities.

The lease revenue bonds are secured by rental payments to Zions Bank. Under the lease-purchase agreement, the county's new jail facility will be granted to the trustee as collateral. The lease term runs through June 30, 2018 and is subject to renewal by annual appropriation of rental payments, with the county intending to renew the lease annually through August 1, 2046.

Under the terms of the agreement, the county is required to make annual payments directly to the trustee at least five business days prior to each interest and principal payment date. The trustee has the right to take possession of the county's new jail facility upon non-renewal of the lease-purchase agreement.

The county is located in north central North Dakota along the border with Canada and is home to about 14,500 residents.

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