BRADENTON, Fla. – A lawsuit that threatens to invalidate the sole security for bonds issued by the Chilton County Health Care Authority in Alabama prompted Fitch Ratings to place the debt on rating watch negative.
Fitch assigns an AA-minus rating to the authority's $38.13 million of bonds, which were issued in November 2015 to build a 30-bed hospital in the rural county.
The bonds are backed by a local 1-cent sales tax authorized in a local bill by the Alabama Legislature, and overwhelmingly approved by 80% of local voters in a June 2014 referendum.
"The negative watch is based on litigation filed against Chilton County and the Chilton County Health Care Authority which challenges the validity of the sales tax pledged to bondholders and seeks its repeal on procedural grounds," Fitch analyst Michael Rinaldi said Tuesday.
On June 9, as construction on the hospital neared completion, a six-count, class-action lawsuit was filed local accountant Roy Burnett contending that the 1-cent sales tax was illegally imposed because legislators improperly voted on the bill.
The court has stayed action on the Chilton suit as a similar case, from nearby Jefferson County, is before the Alabama Supreme Court.
"Fitch believes that it is unlikely that the state Supreme Court will rule the tax invalid; however, the assignment of the negative watch reflects the severity of the potential outcome of the case, which is inherently unknowable," Rinaldi said, adding that if the tax is struck down bondholders would be in an unsecured position.
An event of default would be considered imminent or inevitable, absent other action, leading to a C rating, according to Fitch.
On Alabama's Nov. 8 election ballot, voters statewide will be asked to pass a constitutional amendment that would ratify hundreds of local bills passed by state lawmakers since 1984 that did not comply with legislative voting requirements, such as bills passed for Chilton and Jefferson counties.
In both cases, legislators used internal rules to determine the number of votes needed to pass a bill.
Although lower Alabama courts have held that procedure violates voting requirements imposed by the state's constitution, the Nov. 8 amendment would sanction the bills passed under rules adopted by lawmakers.
Rinaldi said Fitch will monitor the results of the election and the "retroactive application" of the amendment.
"It is not clear to Fitch that the constitutional amendment alone would resolve the issue," he said.
Chilton bond attorney J. Hobson Presley Jr., a partner at Balch & Bingham, said in an Oct. 27 interview that he believes the county's sales tax is valid.
Balch & Bingham also represents Jefferson County in the matter before the state Supreme Court.
The existence of the lawsuit challenging the 1-cent sales tax was first disclosed to bondholders Tuesday, when Fitch's rating action was posted on Municipal Securities Rulemaking Board's EMMA filing system.
When asked why the suit was not disclosed earlier, Hobson said the filing of a lawsuit is not necessarily a reportable event under Securities and Exchange Commission Rule 15c2-12, the continuing disclosure agreement.
"Our analysis is that the matter is pending at the Supreme Court," he said. "If they render an adverse opinion that would have an effect on Chilton County, and would be something you would report" on EMMA.
