Moody's Investors Service has downgraded to B1 from Baa1 the underlying rating on the Oakdale Public Financing Authority's 2002 revenue bonds, Series A, which are secured by the city of Oakdale's pledge of net revenues from its sewer enterprise.
The rating remains under review for possible downgrade.
The rating action reflects the sewer enterprise's August 31 debt service payment default on an unrated state revolving fund loan to the city that is secured on a parity basis with the Oakdale Public Financing Authority's 2002 revenue bonds, which are rated by Moody's.
The rating is on review for further downgrade at this time while Moody's evaluates the sewer enterprise's prospects for recovery given the state loan default.
The default was driven primarily by the city's failure to anticipate the additional debt service due on the recently executed state loan agreement. Failure to anticipate and budget for the additional debt service resulted in a shortfall that should have been anticipated and highlights the city's lack of financial controls and weak financial and debt management.
The review will focus on prospects for recovery, including measures to remedy the missed loan payment, ability to make full and timely payment on rated bonds and the state loan in the future, and credibility of plans to meet the rate covenant and other legal terms and conditions of the trust indenture and state loan agreement.
Additional rating considerations include a limited unrestricted reserve position, lagging regional economy, uncertainty of future financial performance due to lack of projections from the city, and possible customer resistance to another substantial rate increase which may be needed to service future debt and bolster operations given the low maximum annual debt service coverage estimated at 0.6x.