CHICAGO - A Wisconsin city that fell into junk bond status after defaulting on notes tied to a power plant conversion project that went awry has won back its investment grade rating.
Moody's Investors Service raised Menasha's general obligation three levels to Baa2 with a stable outlook, two levels into investment grade territory.
The upgrade Wednesday came after several years of incremental upgrades to Ba2 from B1. That's where Menasha's $29 million of general obligation bonds were dropped in 2009 after the default on $23 million of bond anticipation notes. The notes were sold to help finance the conversion of a power plant to industrial steam operations.
At the time, Moody's penalized the city for failing to honor its appropriation pledge or to issue refunding notes to pay off the maturing notes that then defaulted.
"Although the city did not default on its GO debt, its unwillingness to meet the commitment brought into question the city's willingness to meet all of its obligations," Moody's said in the new report. "While the city defaulted on its BANs it continued to make general obligation debt service payments on time and in full, which is reflected in the upgrade."
The city in 2012 finalized a settlement with bondholders who had sued and in June closed on the sale of the plant to Simply Incredible Foods for $1 with a $400,000 guarantee to remediate environmental liabilities, "both of which provided stability to the city's current and future financial position," Moody's said.
The new upgrade impacts $6.1 million of the city's $35.3 million of general obligation unlimited tax bonds. The remainder is not rated.
With its eye on preserving its economic base, Menasha decided in 2004 to convert a portion of its electric generation plant to produce industrial steam to support area paper mills.
The mills were interested in purchasing steam from a central plant that used coal as its primary fuel in an effort to save money.
But the coal-fired plant — burdened with growing construction costs, unfavorable regulatory rulings and pricing disputes — failed to generate sufficient revenue to cover both operations and debt service.
The plant conversion was originally supposed to cost just $13 million but the price tag rose to $41 million. Given the plant's losses and dim prospects, the city could not refinance the notes into long-term debt as originally intended.
Menasha defaulted on the notes in September 2009, including $12 million sold in 2005 to convert Menasha Utilities' power plant to coal-fired steam operations and $11 million issued in 2006 to cover the project's growing costs. The city's appropriation pledge backed up the revenue pledge that repays the notes. The plant was shuttered in the fall of 2009.
A group of bondholders filed a federal complaint after the default alleging that Menasha and its utilities division misrepresented the coal-fired plant's business prospects and the true costs of converting it to steam operations. They alleged Menasha violated federal and state laws by misrepresenting the prospects of the steam plant and providing misleading information about the plant's final costs, completion date, and prospects.
The city had countered that the bond offering statements offered only an "estimated" cost and an "expected" completion date. It also cautioned that the plant had four "potential" users, but offered no guarantee all would use it.
The city also asserted that at the time of the offering it fully intended to convert the notes to long-term bonds when they came due and only the plant's failure prevented them from doing so.
The federal courts in 2011 approved a $17.5 million settlement with bondholders that resolved litigation over the city's default. By then, the default had taken its toll on city finances, its credit standing, and hurt its related issuers' ability to access the market.
Menasha sold its electric utility assets to WPPI Energy — a regional wholesale supplier of power to 51 members, including Menasha — in an $18 million sale-leaseback transaction that provided the bulk of funds needed to cover the settlement.
The rating reflects a moderating debt burden, the sale of the steam plant, the default and 75% recovery rate, and the city's adequate financial position and location in a stable regional economy.
Moody's stable outlook reflects the expectation that the city's tax base and financial position will not materially change over the medium term.
The city has issued only modest amounts of new money debt for the last several years but anticipates borrowing $1 million annually through the state trust fund loan program for capital projects, Moody's said.
The city's challenges include exposure to the manufacturing sector and relatively weak demographic profile as well as an elevated debt burden.
