RFP Staff
♦ Moody’s Downgraded Salisbury N.C.’s bond rating, citing debt and risk associated with Fibrant. Absolutely no surprise there. The city of Salisbury has been covering up the failure of their fiber optic network and their inability to sell its services. The city of Salisbury owns all the earmarks of a city in major trouble no matter how much they try to spin it and smoke screen it. Understaffed police and fire departments and inability to maintain city properties to the point of looking junglesque are clear indicators of money trouble. Fibrant is a true debacle.
According to Moody’s report on Salisbury, N.C:
“New York, April 11, 2014 — Moody’s Investors Service has downgraded the City of Salisbury’s (NC) General Obligation bond rating to A3 from Aa2 affecting $3.3 million in outstanding parity obligations. Additionally, Moody’s downgraded, to Baa3 from A1, the city’s Certificates of Participation (COP) affecting $18.4 million. The city has an additional $17.0 million in parity Bank Certificate obligations downgraded to Baa3 from A1. Lastly, Moody’s downgraded to A3 from Aa3, the rating on the city’s Combined Enterprise System revenue bonds affecting $30.5 million in Moody’s rated debt.
The city’s general obligations are secured by the full faith and credit of the city. The COP and Bank Certificates are secured by the city’s annually-appropriated lease payments to the Trustee as well as a first lien on the financed assets. Finally, the Combined Enterprise System Revenue Bonds are secured by the net receipts of the city’s water system and wastewater system.
RATING RATIONALE
The GO downgrade to A3 primarily incorporates the city’s outsized enterprise risk associated with its broadband enterprise (Fibrant), with considerable operating pressure should the Fibrant continue to underperform. The rating also reflects Salisbury’s stable, slightly concentrated tax base, a healthy General Fund reserve, and a modestly elevated direct debt burden.
The downgrade to A3 on the city’s combined enterprise system revenue bonds primarily reflects the system’s ongoing operational support of broadband system which has resulted in a history of borrowing water & sewer fund liquidity to balance operations and meet debt service requirements of the fiber optic network. Over the past few years, $7.6 million was redirected from the city’s water & sewer enterprise to support the fiber optic network which has resulted in a narrowed but still acceptable cash position for the water & sewer fund. The city reports no plans for principal repayment and does not include repayment in their pro-forma calculations. The rating further considers the quality of the receivable owed to the combined enterprise by the fiber optic network. Additionally, the rating incorporates Salisbury’s stable service area with ample system capacity and a manageable debt profile.
The COP and Bank Certificate downgrade to Baa3 reflects a widened notching relative to the GO for the non-essential asset which has experienced operational and debt payment shortfalls since inception. In 2008, the city issued COP and privately placed bank certificates to construct “Fibrant”, a fiber-to-the-home network. Currently, the city has met debt service requirements by renegotiating the terms of the private placement principal maturities and borrowing cash from the city’s water and sewer fund. Additionally, the rating incorporates the over-leveraged (157%) asset associated with the COP and Bank Certificates.
The negative outlook reflects Moody’s belief that the city’s broadband system will continue to be challenged to meet its forecasted financials which include customer growth and a rate increase that has not yet been adopted. It also reflects the city’s lack of budgeting for COP and Bank Certificate debt service from its general fund. A continued reliance on extraordinary borrowing from the water and sewer fund, rather than paying COP and Bank Certificate debt service from the broadband enterprise or the general fund budget, could result in additional negative pressure on the credit.”
For more reading about the Fibrant fiasco:
http://rowanfreepress.com/fibrant/
