CHICAGO – Coralville, Iowa's general obligation bond rating moved closer to speculative grade amid balance sheet struggles due in part to its investment in recreational enterprises.
Moody's Investors Service Dec. 9 lowered its rating on the city's GOs to Baa3, the lowest investment grade level, from Baa2. The outlook remains negative. Moody's previously lowered the ratings to their current levels in 2013.
The city's annual appropriation debt includes certificates of participation secured by lease payments and tax-increment financing bonds with payments on both subject to appropriation. That debt was lowered to further down in junk territory to the Ba2 level from Ba1.
Coralville has $93.5 million of GOs and $146.6 million of appropriation backed bonds. The two notch distinction from the city's GO rating reflects the risk of non-appropriation as well as the non-essential nature of the financed projects.
"The Baa3 GO rating is indicative of the city's elevated debt profile and highly leveraged TIF districts which will require debt restructuring to meet debt service obligations in fiscal 2016; and substantial contingent liabilities due to the city's ownership of a hotel, golf course, performing arts center and a brew pub and restaurant," Moody's wrote.
Other factors include the city's narrow cash position across all funds that is expected to improve based on draft results for fiscal 2015. The rating further incorporates the city's sound regional economy with above average socioeconomic indices and manageable unfunded pension liabilities.
The rating also incorporates the reputational risk that the city would incur if it did not appropriate to pay the bonds in any year which Moody's considers "especially critical to management given the city's frequent borrowings that require regular access to the capital markets."
Coralville is five miles from Iowa City in Johnson County and has a population of 18,907.
In separate reports on Dec. 9, Moody's downgraded to the city's $7.6 million of sewer bonds and $2 million of water revenue bonds to Baa3 from Baa2. Both also carry a negative outlook.
"The downgrade to Baa3 reflects the system's interrelationship with the city, the GO rating of which is Baa3," Moody's wrote in both reports. "The utility is an open loop system, allowing for transfers and loans to and from the city's other operating funds."
The ratings also incorporates the sewer system's limited liquidity which is expected to improve in fiscal 2015; modestly sized and somewhat concentrated customer base; adequate history of operations and satisfactory legal covenants.
