Moody’s drops Salisbury’s bond rating, citing Fibrant debt, risk

Published 12:00 am Wednesday, May 14, 2014

SALISBURY — Moody’s has downgraded the city of Salisbury’s bond rating because of debt and risk associated with Fibrant, the city’s broadband utility.
Moody’s said in a news release that Fibrant is not living up to expectations to be self-supporting. Moody’s also said Fibrant will have a hard time meeting the subscriber and revenue projections, and the city plans a rate increase that has not yet been adopted.
City Manager Doug Paris said the city disagrees with Moody’s decision.
“The last three years we as a city have doubled our general fund balance, ceased interfund loans to the broadband fund, and our broadband fund is on track to break even this year,” he said. “We expect our city to outperform Moody’s outlook.”
Moody’s downgraded the city’s 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, affecting $18.4 million. The city has an additional $17 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 downgrade to A3 on the city’s combined enterprise system revenue bonds primarily reflects the system’s ongoing operational support of Fibrant, which has resulted in a history of borrowing water and sewer fund liquidity to balance operations and meet debt service requirements of the fiber optic network, Moody’s said.
Another bond rating agency, Standard & Poor’s, recently upgraded the city’s bond rating to AA from A1.
Over the past few years, Fibrant has borrowed $7.6 million from the city’s water and sewer enterprise. That has resulted in a narrowed but still acceptable cash position for the water and sewer fund, Moody’s said.
The agency said the city reports no plans for principal repayment and does not include repayment in its pro-forma calculations. The rating downgrade also considers the quality of the receivable owed to the combined enterprise by Fibrant.
Additionally, the rating incorporates Salisbury’s stable service area with ample system capacity and a manageable debt profile.
The downgrade to A3 primarily incorporates the city’s outsized enterprise risk associated with Fibrant, with considerable operating pressure should Fibrant continue to underperform, Moody’s said.
The rating also reflects Salisbury’s stable, slightly concentrated tax base, a healthy general fund reserve and a modestly elevated direct debt burden.
Moody’s negative outlook reflects the agency’s belief that Fibrant will continue to be challenged to meet its forecasted financials, which include customer growth and a rate increase that has not yet been adopted.
The negative outlook also reflects the city’s lack of budgeting for certificates of participation, or COP, and bank certificate debt service from its general fund, Moody’s said.
A continued reliance on extraordinary borrowing from the water and sewer fund, rather than paying COP and bank certificate debt service from Fibrant or the general fund budget, could result in additional negative pressure on the credit, according to Moody’s.
Moody’s said Fibrant is a non-essential asset that has “experienced operational and debt payment shortfalls since inception,” leading to the COP and bank certificate downgrade to Baa3.
In 2008, Salisbury issued COP and privately placed bank certificates to construct Fibrant, a $33 million 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 percent — asset associated with the COP and bank certificates.
Moody’s listed the city’s strengths as:
• Stable tax base with slight concentration
• Oversight by the state’s Local Government Commission
• Stable water and sewer operations
Challenges were listed as:
• Significant operating pressure from Fibrant risk
• Limited enterprise liquidity
• Over-leveraged non-essential asset profile of Fibrant
Moody’s said it could remove the negative outlook and upgrade the bond rating if Fibrant shows “sustained stabilization” in operations and pays back the debt owed to the city’s water and sewer reserve fund.
The rating could be further downgraded with general fund reserves deterioration, continued deterioration of the city’s water and sewer enterprise and Fibrant’s continued reliance on other city funds to balance operations, Moody’s said.

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