BRADENTON, Fla. — Fitch Ratings downgraded Salisbury, N.C.'s water and sewer bonds to A-plus from AA-minus, citing the city's support of its fledgling fiber optic broadband system.
The Sept. 19 downgrade affects $14.7 million in water and sewer system revenue refunding bonds issued in 2010, the only debt of the city rated by Fitch. The water and sewer system had a total of $30.5 million in bonds outstanding at June 30, 2013.
The outlook is stable at the lower rating.
Moody's Investors Service earlier downgraded all of the city's ratings, including general obligation bonds, due to pressures from the city-run fiber system called Fibrant, which offers telephone, Internet, and television service.
Fitch, like Moody's, said its lower rating reflects the water and sewer system's substantial financial support from 2011 to 2013 of Fibrant.
"The system loaned Fibrant $7.6 million for non-essential, non-system related needs, which led to a drop in system liquidity and added pressure to the system's financial profile," said Fitch analyst Teri Wenck. "Liquidity has softened, dropping to $7.6 million in 2013, from $12 million in fiscal 2010, [as] a result of inter-fund loans to Fibrant."
Wenck said additional financial support for Fibrant could result in further negative rating action.
While financial performance remains sound, Fitch said the system’s liquidity, characterized as strong at over 500 days of cash on hand in fiscal 2008, has dropped to less than 200 days cash on hand and is below the A category median of 254 days.
John Sofley, salisbury’s interim city manager, said Fitch’s “report clearly identified their concern that Fibrant is an ongoing risk even though there were no interfund loans in fiscal years 2013-2014, and none are expected in future years.”
“The downgrade was appropriate based on the days cash on hand and Fitch’s standards,” Sofley said in an email. “With the cost cutting measures implemented by the city and growth in the customer base, no additional interfund loans from the water and sewer fund are anticipated.”
Salisbury is the seat of Rowan County, and is located about 44 miles northeast of Charlotte. Fibrant had about 2,500 customers in fiscal 2013.
Over the last decade, the city's water and sewer system has transitioned into a regional service provider serving a population of about 52,800 in Salisbury, and eight other municipalities in Rowan County, according to Fitch.
Operating pressure from the broadband system prompted Moody's in April to downgrade Salisbury's $3.3 million in general obligation bonds to A3 from Aa2, its rating for $18.4 million in certificates of participation to Baa3 from A1, its $17 million in bank certificate obligations to Baa3 from A1, and the $30.5 million in water and sewer bonds to A3 from Aa3.
Moody's said the outlook is negative.
"The GO downgrade to A3 primarily incorporates the city's outsized enterprise risk associated with its broadband enterprise," said Moody's analyst Kenneth Surgenor.
The COP and privately placed bank certificate obligations were issued in 2008 to construct the Fibrant fiber-to-the-home network.
According to Moody's, the city has met Fibrant's debt service requirements by renegotiating the terms of the private placement, and borrowing cash from the city's water and sewer fund to service the COPs.
The Salisbury City Council launched Fibrant in December 2010, the largest project ever undertaken by the city, according to the 2013 comprehensive annual financial report.
Moody's said Salisbury's case highlights the risk that a city assumes when it takes on a non-essential, competitive enterprise with a limited ability to generate revenues sufficient to cover expenses.
Many of the city's COPs are trading above par. On July 22, a customer bought $5,000 of COPs maturing in 2029 at $110.06 to yield 3.25%. On Aug. 5, a customer bought $15,000 maturing in 2028 at $113.33 to yield 2.51%.