Rating Action: Moody's affirms Warwick, RI's GO Bonds at A1; outlook remains negative
Global Credit Research - 13 Oct 2015
$42M in rated debt affected
New York, October 13, 2015 -- Moody's Investors Service has affirmed the A1 rating on the City of Warwick, Rhode Island's general obligation (GO) debt. The rating outlook on the city's GO debt remains negative. Concurrently, we have affirmed the Aa3 rating on two Rhode Island Health and Educational Building Corporation (RIHEBC) pool financings that the city is a participant in: those relating to the Series 2010A and 2010G bonds.
SUMMARY RATING RATIONALE
The A1 reflects the city's large tax base with slightly above average wealth levels, manageable debt burden, large pension and OPEB liabilities and below average reserve levels. The rating also takes into account the city's underfunding of its actuarially required pension contributions for one of its public safety pension plans.
The Aa3 pooled financing rating incorporates Warwick's A1 GO rating and as well as the ratings of the other pool participants. RIHEBC's 2010A and 2010G bond issues are unenhanced pools and are rated using a 'weak link plus' approach. The rating also takes into account that a portion of debt service that is directly paid to RIHEBC by the state. Additionally, the ability to intercept certain state aid related to construction of school facilities was factored into the rating. The rating of the two other participants, Town of Westerly (Aa2) and Chariho Regional School District (Aa3) lift the pool rating above the lowest rating of A1.
The negative outlook on the city's GO debt reflects our expectation that the city's already narrow financial position will continue to be pressured, partly attributable to the settlement of commercial tax appeals in FY2015 and 2016. Further erosion of reserves from current levels will place strong downward pressure on the rating. The outlook also factors in the continued underfunding of the city's largest pension plan.
WHAT COULD MAKE THE RATING GO UP:
- Surplus operations resulting in increased reserves and liquidity
- Full funding of pension liability
WHAT COULD MAKE THE RATING GO DOWN
- Operating deficits resulting in declines in reserves and liquidity
- Weakening of tax base
- Growth in fixed (pension, debt service, & OPEB) costs
Warwick is the 2nd largest city in the state with a population of 81,971. The city is located about 12 miles south of downtown Providence (Baa1 stable).
The city's outstanding debt is secured by a general obligation unlimited tax pledge.
The Series 2010 A and 2010 G Bonds are special obligations of the Rhode Island Health and Educational Building Corporation (RIHEBC), secured solely by the loan payments from the pool's borrowers under their respective financing agreements. Loan repayments which are due under each financing agreement are scheduled to be sufficient to pay the borrower's proportionate share of the principal, sinking fund installments and redemption price of and interest on the Series 2010 A and Series 2010 G Bonds. From the bond proceeds, each borrower received a loan. Each borrower also privately placed its general obligation unlimited tax bond with RIHEBC. There is no cross collateralization or cross default, therefore no borrower is responsible for the loan repayments of any other borrower and default of one borrower will not constitute default of any other borrowers. The other two pool participants in each of the series is Chariho Regional School District (Aa3) and the Town of Westerly (Aa2). The City of Warwick's percentage participation in each series is roughly 31%.
Favorably, a portion of debt service is directly paid to RIHEBC by the state. Additionally, the ability to intercept certain state aid related to construction of school facilities was factored into the rating.