CHICAGO — Rating pressures on five Wisconsin school districts involved in a now-worthless $200 million investment product eased on Monday when Moody’s Investors Service labeled as a credit positive their partial settlement of a lawsuit against the firms that advised and arranged the deal.
The districts settled their lawsuit last week against Stifel Financial Corp. They alleged the firm misled them on a risky investment in synthetic collateralized debt obligations to help fund their retiree health care benefits. The districts and Stifel also announced they were joining forces to take aim at the product’s arranger, RBC Capital Markets LLC.
Under terms of the settlement, Stifel paid $13 million to the districts and provided a standby letter of credit for an additional $9.5 million, to be paid when Stifel resolves charges it faces from the Securities and Exchange Commission, among other conditions.
At the center of the settlement is Stifel’s forgiveness of $154 million of notes issued by the districts’ other post-employment benefit trusts and purchased by Depfa Bank. Stifel bought the notes from Depfa last year at a discount. Stifel relieved the districts of their moral obligation to repay the notes.
The districts had put their moral obligation pledge behind the notes, issued in 2006 to fund the trusts’ investments in the CDO products. As the value of the investment shrunk after the collapse of the subprime housing market, Depfa demanded repayment of the notes in 2007 as permitted in the loan agreements.
The districts refused to make good on their pledges, and as a result their Moody’s ratings deteriorated. In a weekly credit outlook issued Monday, analyst Hetty Chang called the development “a significant positive development for these school districts.” The settlement eases pressures most notably on the three districts carrying negative outlooks.
“The negative outlooks primarily hinged on the potential impact of the liability and this settlement obviously releases them from that liability,” Chang wrote. The other two carried stable outlooks based on their overall credit profile and ability to pay off the debt if required. All of the districts suffered one- to two-notch downgrades for refusing to make good on the moral obligation pledge.
The five districts are the Kenosha Unified School District, the Kimberly School District, the Waukesha School District, the West Allis/West Milwaukee School District and the Whitefish Bay School District. Kimberly and Whitefish Bay are both rated Aa3 with a stable outlook.
Kenosha, which has a budget of $270 million and was on the hook for $28 million of notes, is rated A1 and negative. Waukesha, which has a budget of $157 million and was on the hook for $48 million, is rated A1 and negative. West Allis/West Milwaukee, with a budget of $103 million and on the hook for $61 million, is rated A2 and negative.
The Stifel settlement brings to $218 million the amount recouped by the districts on their $200 million investment. They still have between $20 and $30 million in unrecovered legal and administrative costs. The districts also received funds from an RBC/SEC settlement last year.