Water VRDBs Sink to A-Plus

Fitch Ratings on Monday downgraded the long-term rating on the Tohopekaliga Water Authority’s Series 2007 variable-rate revenue bonds to A-plus from AA-minus.

The lower rating is in connection with converting the bonds from the auction-rate mode to variable rate and the provision of an irrevocable, direct-pay letter of credit issued by Landesbank Hessen-Thuringen Girozentale securing the variable-rate bonds, Fitch said.

A short-term rating of F1-plus was also assigned to the converted bonds currently outstanding in the amount of $92.4 million.

The bonds were initially issued in an auction-rate mode enhanced by insurance from former triple-A rated CIFG Assurance NA. CIFG is currently rated A-minus by Fitch, A-plus by Standard & Poor’s, and A1 by Moody’s Investors Service. Fitch and Standard & Poor’s also assign a negative outlook.

Fitch said the insurance policy is expected to be canceled upon conversion of the 2007 bonds. The remarketing agent is First Southwest Co.

In April 2007, Fitch upgraded the Tohopekaliga Water Authority’s debt to AA-minus from A-plus. The agency said it would continue to rate the utility’s outstanding debt AA-minus.

The authority had $182 million of 2003A and B bonds outstanding through 2029, according to the fiscal 2007 financial report. The 2003 bonds are backed by an insurance policy from Financial Security Assurance Inc., which remains triple-A rated.

Last month, Standard & Poor’s placed its A-plus rating for the Tohopekaliga debt on negative watch due to the failure of the system’s auctions, which resulted in the authority purchasing its own bonds prior to conversion. It also entered into a $50 million bank line of credit.

“Although cash and reserves are currently strong, purchasing the bonds and potentially drawing on the line could pressure the system’s financial condition,” Standard & Poor’s said at the time. “In addition, although the authority believes that purchasing and holding the bonds is cost-effective, the total cost of this process will not be clear until the bonds are placed back into the market.”

Moody’s currently rates the bonds A1.

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