Standard & Poor’s Tuesday removed the Alabama Public School and College Authority’s AA bond rating from negative CreditWatch.
The agency last month placed the bonds on watch because of uncertainty related to a pending federal lawsuit in which the APSCA is seeking to potentially void several swap contracts with JPMorgan, citing what it calls contractual irregularities and issues regarding state law.
Standard & Poor’s had said that the swaps in question would be on parity with the authority’s debt payments.
“We removed the rating from CreditWatch with negative implications based on our review of an opinion we received from the authority’s counsel to the effect that the authority did not grant or intend to grant, as security for swap payments, a lien on any revenue pledged as security for the bonds,” said a statement by analyst Sussan Corson.
Standard & Poor’s did assign a negative outlook to the APSCA’s bonds to reflect continued uncertainty about the federal case, which was filed Oct. 28.
“Because the court’s ruling could potentially require the authority to make certain payments under the swap contracts, the decision might, in our view, reduce the authority’s flexibility to maintain what we consider its historically strong monthly coverage levels and liquidity,” Corson said. “The timing of the court’s decision is unknown. Should officials fail to manage any additional obligations to maintain good combined coverage levels and liquidity in all months, we could lower the rating.”
The case involves a swaption on which JPMorgan exercised an option last year. It would have required the authority to issue variable-rate refunding bonds by Nov. 1. In addition to questions about the legality of the swap contract, there was no market for the refunding bonds at the time.
However, the clock is ticking. Swap payments are scheduled to begin tomorrow and so far no court hearings have been scheduled in the APSCA’s suit.
Federal Judge William Keith Watkins ordered motions to be submitted by Dec. 23 and set earlier deadlines for briefs to be filed. But court records indicate nothing has occurred in the case since then.
Although there is a dispute over the swap contract, state officials have said the authority still plans to make all underlying debt payments.