MOODY'S LOWERS POLK COUNTY, IOWA, GENERAL OBLIGATION BONDS TO 'A' FROM 'Aa'
MOODY'S LOWERS POLK COUNTY, IOWA, GENERAL OBLIGATION BONDS TO 'A' FROM 'Aa' NEW YORK, Jan. 17 /PRNewswire/ -- Moody's Investors Service has lowered the "Aa" general obligation bond rating on Polk County, Iowa, to "A" following conclusion of an extensive review and meetings with county officials. The lowering reflects what Moody's sees as deficiencies in the county's debt and management policies which led to the Dec. 2, 1991, payment default on the Polk County, Iowa Sports Facility revenue bonds, Series 1984 (the "racetrack bonds") currently rated "Caa." The racetrack bonds are ultimately secured by an absolute and unconditional commitment by the county to pay the bonds in the event sufficient funds for debt services are not provided by the project lessor, the Racing Association of Central Iowa (RACI). The default was precipitated by RACI's filing for bankruptcy, which occurred on Nov. 27, 1991. The county's funds to be utilized to fund the Dec. 2, 1991, debt service payment and June 1, 1992, interest payment were subject to the automatic stay provision (Section 362(a)) of the Federal Bankruptcy Code and held in escrow, pending a lifting of the stay by the bankruptcy court. RACI's bankruptcy filing followed an action the prior evening by the County Board of Supervisors to reject RACI's operating plans for 1992 and reduce the county's subsidy to RACI. Background Moody's lowered the county's general obligation bond rating from "Aaa" to "Aa" in July 1991 citing the fiscal drain on the county imposed by the racetrack bond debt service and RACI subsidies and lack of a plan to reduce the drain. The county reacted to the downgrading by commissioning a study by Arthur Andersen & Co., to determine ways to improve the RACI's finances sufficiently to eliminate the county operating subsidy and make the bonds self-sufficient from RACI payments. The study, which was submitted to the county on Sept. 30, 1991, makes a number of recommendations, the overwhelming majority of which require state enabling legislation. The county administration took no action to draft or obtain sponsors for any such legislation at that time. RACI Financial Condition Deteriorates RACI's fiscal condition continued to deteriorate throughout late 1991, and this weakening necessitated a further request for county funds in order to meet its operating needs through calendar 1991. Events Leading to the Default On Nov. 26, 1991, the County Board of Supervisors met to authorize payment by the county to the racetrack bond trustee of the remaining funds necessary to make the Dec. 2, 1991, payment on the racetrack bonds and react to RACI's proposed operating plans for 1992. The board, in addition to authorizing payment to the racetrack bond trustee of sufficient funds to make both the Dec. 2, 1991, principal and interest payment and the June 1, 1992, interest payment, voted to: (a) disapprove all three of RACI's plans; (b) limit the operating subsidy to a maximum of $100,000 per month for six months; (c) authorize purchase of RACI's equipment bonds, which were reportedly in technical default; and (d) reaffirm the county's intent to meet its financial obligations and effect a refinancing of the racetrack bonds, assuming a finding of the legality of the county's obligations on the bonds by the Iowa Supreme Court. A decision by the court is expected in the late spring or summer. As noted above, the county's actions were followed by an emergency RACI executive committee meeting the following morning at which RACI decided to file a petition for bankruptcy under Chapter 11 (reorganization) of the Bankruptcy Code. The bond default occurred the following Monday as a result of the stay provisions imposed by the Bankruptcy Code on the county funds. County Actions Put Bondholders at Risk Moody's recognizes the limited and difficult choices faced by the county once the racetrack proved not to be viable financially. Nevertheless, the county's actions in pressing ahead to stem the cash drain by cutting back on RACI's subsidy and operations without having reached an agreement with RACI appears to have so threatened RACI's continued existence as to make a RACI bankruptcy filing perhaps inevitable. The county's failure to adequately anticipate the consequences for racetrack bondholders of a RACI bankruptcy filing left the bondholders unnecessarily and inappropriately exposed to a default, which occurred almost immediately thereafter. Moody's believes that the county's actions were not in the best interests of the racetrack bondholders and suggested serious problems with the county's abilities to manage its debt and financial affairs prudently. The problems suggested -- lack of concern for the racetrack bondholders, willingness to take precipitate action without fully considering the consequences, and an inability to take effective action to resolve its financial problems without precipitating a bond default -- are not in line with the sound management approach which Moody's believes must be demonstrated by a credit aspiring to a high quality status. Consequently, Moody's has lowered the county's general obligation bond rating to the average "A" category. Racetrack Bond Default Cured Moody's understands through conversations with county officials and the bond trustee for the racetrack bonds, that the Dec. 2, 1991, payment default has been cured through the lifting of the automatic stay on the county funds required to enable the bond trustee to fully pay the bonds. In addition, information conveyed to Moody's today indicates that RACI has received two offers to purchase its assets and assume its obligations. The offers, acceptance of which would require approval taken by the bankruptcy court are contingent upon passage of state legislation to improve the financial potential of the racetrack operation. However, the stay still stands with regard to the remaining county funds for the June 1, 1992, payment, as it does for all subsequent payments. Additionally, the Iowa Supreme Court still has to reach a decision on the legality of the county's obligation to pay the racetrack bonds. Finally, the purchase offers to RACI are contingent upon passage of legislation, which cannot be assured. Consequently, the long-term credit status of the racetrack bonds remains in question and Moody's has chosen not to change the "Caa" rating applicable to the bonds. Moody's will continue to monitor the situation and offer updates on the county's credit position as it seeks to resolve the financial difficulties surrounding the racetrack and the racetrack bonds. -0- 1/17/92 /CONTACT: Jamie Burr, vice president & assistant director-legal analysis, 212-553-0471, or Dan Aschenbach, assistant vice president- regional ratings, 212-553-0880, both of Moody's/ CO: Polk County, Iowa ST: Iowa IN: SU: RTG
JT-CK -- NY057 -- 1133 01/17/92 16:38 EST
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|Date:||Jan 17, 1992|
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