After the city’s sewer enterprise bond rating took a beating last year from Moody’s Investor Services and being downgraded, the financial firm announced on Friday, Aug. 16 that it had removed the “negative outlook” tag attached to the sewer bond.
“This is positive news that illustrates that we are making steps in the right direction,” said Oakdale City Manager Brian Whitemyer.
Moody’s still affirmed the B-1 rating on the City of Oakdale’s 2002A Sewer Enterprise Revenue bond when it removed the negative outlook.
According to Moody’s, the B-1 rating reflects the city’s historically poor financial performance and economically challenged service area, as well as managerial missteps that led to the earlier default. The rating also takes into account the projected low maximum annual debt service coverage, which highlights the degree of financial improvement that will be necessary to service the increasing debt service burden.
In May 2012, the sewer bond rating of A-3 rating was dropped to B-1, citing weak financial and debt management practices.
In August 2012, Moody’s expressed concern that the city defaulted on the principal portion of the first debt service payment on a $13.2 million unrated state revolving fund.
The removal of the negative rating outlook reflects the restructuring of the State Revolving Fund (SRF) debt which results now in more affordable debt service payments over the next few years, the adoption of multi-year rate increases, the commencement of funding of a debt service reserve fund, new management, and the stabilization of the system’s finances.
Moody’s stated in November of 2012, the credit profile of the sewer system had stabilized. In June 2013, the city restructured its $13.2 million State Water Resource Control Board loan.
A Moody’s report states there was miscommunication among city staff regarding when the first payment was due to the state. City officials incorrectly believed the first payment was due in August 2013; however, the first payment was actually due in August of 2012.
Despite rate increases in fiscal 2009, 2010, 2011 and 2012 the city failed to levy rates sufficient to make the full amount of the 2012 debt service payments on the SRF loan. Net revenues were sufficient to pay the full debt service of $211,000 due on the rated bonds and only the interest of $324,697 on the state loan obligations, resulting in a default on the principal on the SRF loan in the amount of $519,071.
Under the terms of the restructuring of the SRF loan which was finalized in June of this year, the final maturity date and the total principal obligations remain unchanged, although the amortization schedule has been modified and backloaded, resulting in lower annual principal payments over the next seven years compared with the original repayment schedule.
Per the new schedule, the city is scheduled to make an interest only $329,200 payment on Aug. 31, 2013 and resume principal payments in August of 2014.
Moody’s calculated a loss on the SRF loan of approximately 6.5 percent.
While ratings of defaulted debt with losses of 5 percent to 10 percent will typically be in the C-1 rating category, the higher B-1 rating takes into account that the debt service payments on the sewer bond continued to be made on time and in full.
Moody’s stated the rating also reflects their expectation of stabilization of the system due to anticipated multi-year rate increases, more manageable debt service levels over the next few years, and new management.