The Fifth Downgrade

Moody’s Investors Service on Monday downgraded West Allis/West Milwaukee School District’s general obligation rating to A2 from A1 with a negative outlook after the district board reneged on its moral obligation pledge to repay asset-backed notes issued by its non-pension retiree health care trust. The action affects $18.5 million of outstanding GO debt.

It is the fifth Wisconsin district to be downgraded by Moody’s in connection with such debt. Final budgets will be approved this fall. The five districts issued a combined $165 million of asset notes to fund their investment in collateralized debt obligations that involved credit default swaps.

The investments are now worthless and the districts have filed a lawsuit against the firms that put together the investment scheme. West Allis’ trust owes $60 million to the note holder, Depfa Bank Plc. The amount is equal to 69% of the district’s general fund budget.

Moody’s attributed the downgrade to risk posed by the district’s decision to put its moral obligation pledge behind the high-risk investment and the board’s decision to not appropriate funds to make the payment.

The districts put their moral obligation pledge behind the notes issued by their individual trusts and purchased by Depfa. As the investment faltered, the value of the trusts’ collateral sank, triggering a default in late 2007. Depfa demanded repayment in March.

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