S&P Global Ratings downgraded Memphis, Tennessee, sanitary sewerage system revenue bonds to A-plus from AA-plus, with a negative outlook, and Moody's Ratings affirmed its Aa2 rating on the bonds but lowered the outlook to negative from stable.
The action affects $491.3 million of debt including a $62 million bond coming to market, according to Moody's.
S&P cited the "precipitous decline" in the sewer system's unrestricted cash position to 10 days cash on hand as of June 30 (when it had $2.8 million, according to audited figures) from more than 133 days cash on hand a year earlier. Cash on hand declined further, to $1.8 million as of Dec. 31, according to unaudited figures.
"The negative outlook reflects heightened credit risk associated with the system's aging infrastructure and extremely low liquidity position," S&P said on Monday. "We consider the system's current level of liquidity to be well below what we typically view as a reasonable buffer for seasonal cash flow needs, capital requirements, unbudgeted or unanticipated items, and contingency hedges."
S&P excludes restricted debt service reserve funds from its calculation of available funds.
The cash drawdown is partially due to a "relatively sizable" $25 million unbudgeted capital expense in fiscal 2024, S&P said. However, capital spending in both fiscal 2024 and 2025 (which began July 1, 2024) is "significantly higher" than in prior years.
S&P said sewer rates have not been adjusted since 2020 and are not expected to be adjusted until fiscal 2027, creating another fiscal challenge. All-in debt service coverage has declined to 1.7x in fiscal 2024 from 2.9x in fiscal 2021.
S&P said its negative outlook indicates at least a one-in-three chance of a downgrade should capital spending needs pressure margins as the system addresses aging infrastructure and asset hardening.
Management expects the Environmental Protection Agency to reimburse it for $4.4 million in Water Infrastructure Finance and Innovation Act program expenditures by the end of the fiscal year and Memphis' housing and community development office to give it $9.8 million for other costs, S&P said.
Moody's also cited the sewer system's low liquidity and the likelihood that it would not be rebuilt until the fiscal 2027 rate increase in explaining its negative outlook in its report Monday.
The sewer charges are collected by Memphis Light Gas and Water, whose outlook on its
Moody's also upgraded Memphis' stormwater revenue rating to Aa2 from Aa3 on Monday. It cited the bonds' robust debt service coverage of 7.2X and the improved liquidity to 801 days cash on hand. The upgrade affects $35.5 million in debt, according to Moody's.
Neither Memphis' public works department nor its central communications office immediately responded to a request for a comment.
