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.
Hey, just wondering why Kiss decided to inform the City Council of the credit-rating downgrade. It seems his administration usually likes to keep this kind of financial info secret, ya know?. Just sayin'.
Posted by: webber | March 09, 2010 at 10:16 AM
Ouch.
Posted by: Haik Bedrosian | March 09, 2010 at 11:50 AM
Mayor Kiss has indicated that he is concerned about Moody's decision. He should have been more concerned about the decisions his administration made to cause Moody's to react as they did. The best part for the Mayor is that this information was released after town meeting where he and his supporters took a beating, although I think most of us suspected Moody's was going to be in a foul mood concerning Burlington anyhow. Had this info been released before town meeting, Councillor Adrian would probably have had to rent another ship for those jumping on board and asking for the Mayor's resignation.
Posted by: dale tillotson | March 09, 2010 at 01:49 PM
Two more years of Bobo the clown...the clown that keeps serving crap sandwiches to the taxpayers of Burlington. We should begin a betting pool about how much more damage this imbecile can do to the city.
Maybe he can get Leopold to find another city dept to make a liar loan to and book that as an asset to the cashpool. this time why stop at 17 Million why not make it 50Million
Johnny Danger?
Im sure that the progs like Dave Zuckerman are headed to city hall to stock up on office supplies, staplers, paper, pens, pencils, magic Markers and big huge erasers cause the progs never admit their wrong and they never make mitsakes.
Posted by: Buster | March 09, 2010 at 09:44 PM
Am I nuts or is this a direct outcome of the Counsel not allowing BT to be refinanced? And then the State saying no to BT paying the quarterly payment on its debt? Debt to capital ratios are essential to organizational budgets. Alexander Hamilton knew this 230 years ago. Why can't Burlington republicans figure that out...Oh that's right this is about spinning a neither positive nor negative situation to make it a political negative...Good luck BUrlington...You're gonna need it....
PS-In reference to the comments above...Is the BFP comment section down?
Posted by: Richard | March 10, 2010 at 11:30 AM
"Am I nuts or is this a direct outcome of the Counsel not allowing BT to be refinanced?"
1. The CC did not "not allow BT to be refinanced," they insisted on evaluating whether borrowing an additional $10-20m to be squandered by current management was appropriate. Turns out it's not. If realistic projections of your future revenues don't support repayment of a loan, you shouldn't take out the loan, and you're probably not going to get it even if you try.
2. BT's debt to Citi is what you're talking about. BT's debt to the City is illegal. It violates Vermont state statutes, the City Charter and BT's Certificate of Public Good. It was also incurred without a business plan showing how it would be paid back. I doubt Hamilton would have gone along with that.
3. The state did not "say no to BT paying the quarterly payment..." They said no to breaking the law to do so, see 2 above. BT could have used their own money to make the payment if they had had any.
This has gone beyond a political issue at this point. The key players are under criminal investigation. The Moody's situation is just the beginning of the consequences. If you still honestly believe that Leopold did the right thing, you are among a very, very small group of people.
Posted by: Jimmy | March 10, 2010 at 12:30 PM
Um, yep, you are nuts. Or at least you have not been paying attention for the last 4 months or so. The City Council did not cause BT's gross insolvency. In fact, BT's gross insolvency was actually hidden from the CC by Kiss/Leopold until not very long ago. By the time Kiss/Leopold came clean with the CC, BT was well beyond a simple issue of "refinancing."
The Burlington Republicans you're trying to blame did not render BT insolvent. BT and its management and its enablers in City Hall did that. As noted above, "Burlington Republicans" (or Democrats for that matter) did not even know that BT was sinking like a rock. The only ones who knew were Kiss, Leopold, and BT management, and they chose not to inform the CC of the truth.
Time to stop trying to deflect blame onto "Burlington Republicans," or anyone else, for the Kiss/Leopold disaster. That ship sailed a long time ago.
Posted by: webber | March 10, 2010 at 03:00 PM
The worst, saddest, most terrifying days are yet to come for Mayor Kiss and Jonathan Leopold.
Posted by: Thomas | March 10, 2010 at 09:17 PM
And by the way it's City Council, not "Counsel."
The city's "counsel" is its legal adviser, i.e., Joe McNeil. He clearly did not help much in this situation.
Posted by: webber | March 10, 2010 at 10:26 PM