Moody's Downgrades Burlington Credit Rating
* * * Updated below with the official Moody's rating downgrade * * *
Burlington Mayor Bob Kiss announced late Monday that Moody’s Investors Services had downgraded the city's general obligation credit rating two notches from Aa3 to A2, and placed the Queen City on a negative credit watch.
Moody’s will again review the city’s credit within the next 90 days, Kiss told the Burlington City Council at its regular meeting Monday night.
A report and analysis relative to the downgrade will be issued by Moody’s on Tuesday.
Kiss told the council that city officials were told the downgrade resulted from uncertainty around Burlington Telecom’s outstanding $16.9M debit to the city’s pooled cash account. The ability of BT to repay the debit is at risk due to BT’s current financial status. If BT cannot repay the $16.9M, then the city may face longer term cash flow challenges.
The news comes as state regulators are deciding the fate of Burlington Telecom, and the state's "public advocate" — the Department of Public Service — is conducting its own probe into Burlington Telecom's financial and regulatory troubles. As part of that process it is undertaking a forensic audit. As well, the department has forwarded information to the Attorney General's office that it claims may be criminal in nature.
Less than a month ago, the Vermont Public Service Board rejected the city's plea to use pooled cash to help it make a quarterly lease payment, and that set up the city for a possible default on its $33 million lease arrangement with CitiCapital.
“The city has been working to resolve BT’s difficult financial circumstances. Although this was always a potential consequence of these circumstances, we are concerned about Moody’s decision today,” said Kiss. “It is critical that we move forward as quickly and thoroughly as possible to find potential solutions to the financial problems facing Burlington Telecom. Moody’s has given us a 90-day window to do so.”
At its Monday meeting, the council agreed to reconvene the so-called BT Blue Ribbon Committee to review a recent offer dubbed "Reboot BT" crafted by nine businesspeople, three of whom were at the helm of BT when it was created. Along with the committee, a newly-hired financial consultant will be asked to weigh in on the proposal, as well as other short-term offers of help.
* * * Updated March 10th at 11:20 a.m. with Moody's official downgrade report * * *
Late yesterday, Moody's released its official report on the rating downgrade and credit watch it's placed on the city of Burlington. The rating affects about $87 million in outstanding debt and is based on the financial problems associated with Burlington Telecom.
Here is the complete Moody's report:
Moody's Investors Service has downgraded to A2 from Aa3 the City of Burlington's (VT) general obligation bond rating, affecting approximately $87 million in outstanding parity debt. The bonds are secured by a general obligation unlimited tax pledge. Concurrently, Moody's has downgraded the city's outstanding A1-rated Certificates of Participation (COPs) to A3 and its outstanding A2-rated COPs to Baa1, affecting $4 million and $10.4 million in outstanding COPs, respectively. The downgrade largely reflects the city's weakened financial position and strained liquidity resulting from the use of its pooled cash account to finance the expansion of the city's struggling telecommunications enterprise. The Watchlist action reflects the possibility of further downward rating movement over the near term. While the city is actively pursuing a viable solution for the telecommunications system there remains a high degree of uncertainty regarding the city's ability to place the enterprise on a more sustainable path and ultimately repay the funds owed to the city's pooled cash account.
Burlington's financial position and liquidity has been weakened by the deficit operations of the city's telecommunications enterprise. The city's preliminary fiscal 2009 financial statements (as of 6/30) includes a -$15.9 million cash balance associated with the telecommunications enterprise fund. This represents a substantial $7.3 million or 85% increase from the -$8.6 million balance at the end of fiscal 2008 and a 212% increase since the end of fiscal 2007. The deficit cash position is the result of ongoing support from the city's pooled cash account to fund the citywide build out of the telecommunications system, which is currently behind schedule. Despite the city's efforts, the telecommunications system has been unsuccessful generating the cash flows necessary to self-fund its capital and debt expenses or to achieve a realistic refinancing plan to repay the interfund loan due to the pooled cash account, which includes the general fund and the airport enterprise, among other smaller accounts. The electric enterprise and the school department maintain separate bank accounts and are not part of Burlington's pooled cash account. Importantly, at -$15.9 million the interfund borrowing represents a sizable 180% of the city's preliminary fiscal 2009 general fund balance of $8.8 million and 94% of the combined cash balances of the general fund and the airport enterprise. Assuming the general fund fully reflects this interfund loan and adjusting fund balance for the illiquid nature of the receivable, the city's Moody's adjusted general fund reserve position declines to a pro-forma -12% of General Fund revenues from 16% of revenues.
Also of note, the city missed a scheduled February 17th payment on a lease with CitiCapital related to the telecommunications enterprise, following a Public Service Board ruling preventing the city from utilizing any additional funds from its pool cash account to fund telecommunications related obligations. Unless action is taken over the near term allowing payment of the $33.5 million obligation a default would occur on August 17, 2010, following the full utilization of a $1 million debt service reserve fund. Remedies in the event of default include possession of the assets and acceleration of the current year's payments.
Future rating action will depend on the city's ability to produce a viable plan to place the telecommunications system on a more sustainable path and provide additional detail on the prospects for the system to meet its obligations, including repayment of the interfund loan. Additionally, given the city's reliance on cash flow borrowing Moody's will continue to monitor the city's cash position, its ability to meet day-to-day operating requirements, and how a potential default of their outstanding lease obligation would impact operations of the enterprise.