Moody’s new standards lead to downgrade of Carmel bonds


Moody’s Investors Services announced Oct. 17 that three of Carmel’s outstanding lease bonds will be downgraded by the rating agency. This action concludes a review undertaken in conjunction with the July 2016 publication of new standards for rating lease bonds by Moody’s.

Hundreds of bonds are affected nationwide because of a change in rating methodology, including nearly 80 municipal and government bonds in Indiana.

At the same time, Moody’s upgraded the City’s county option income tax bond rating, while downgrading for the lease risk, which involves leasing a project between the city and another city entity.

One of the bonds that will carry the lowered Moody’s rating is the Lease Rental Revenue Bonds of 2005, which helped fund The Center for the Performing Arts and includes The Palladium.  Part of the reason for the downgrade is because Moody’s said The Palladium is “less essential to municipal operations.”

Loren Matthes, a principal at H.J. Umbaugh and Associates, which provides financial advice to the City of Carmel, said the downgrade has nothing to do with Carmel’s credit. She said Moody’s doesn’t like the risk associated with “lease debt.” Lease debt is not subject to the constitutional debt limit because the lease is subject to abatement if the leased premises are unusable. Lease debt is the most common financing mechanism for schools and cities in Indiana because of Indiana’s low debt limit.

“All Indiana lease bonds received a downgrade due to Moody’s new rating criteria and ‘newly’ perceived risk of ‘lease’ debt,” Matthes wrote in an e-mail to Current. “They do not like the lease abatement risk. Much of Indiana’s debt has been structured as lease debt for decades, but Moody’s just happens to be doing an overall methodology change on rating lease debt in all states. Although Indiana issuers have found ways to mitigate this risk, under Moody’s new criteria, all Indiana lease bonds just received an automatic 1 to 2 notch downgrade, with the second notch related to their perceived ‘essentiality’ of the leased premises.”

Three other outstanding Carmel bonds were affected by Moody’s ratings changes.

Two others were downgraded:

  • County Option Income Tax Lease Rental Revenue Bonds, Series 2006. The City said this bond issue will be paid-off at end of 2016.
  • COIT Lease Rental Revenue Bonds of 2010

There was one non-lease bonds issue that received an upgrade because the COIT rating went up and it is not a lease bond.

  • Taxable COIT Revenue Refunding Bonds, Series 2006

Matthes added that Standard and Poor’s Global Ratings continue to rate Carmel property tax debt “AA+” and COIT debt “AA.” She notes that “many Indiana issuers only seek a rating from Standard and Poor’s (sometimes with a second rating from Fitch), because these rating agency analysts seem to better understand Indiana credits and debt risk.”

Moody’s said Carmel could upgrade its rating through “reduction in the city’s debt levels” and “sustained improvement in the city’s operating reserves and liquidity.”

Matthes said those conclusions are beside the point.

“Moody’s report notes that the City has improved its reserves and liquidity, which speaks to their rating of the property tax-paid debt before adjusting for the lease risk,” she said.

Matthes noted that the rating change cannot change the interest rates on the bonds.

“The bond interest rates were fixed at the time of bond issuance,” she said. “A rating change could only affect the trading of the bonds in the secondary market which does not affect Carmel. The fact that the bonds have the dual rating, with higher ratings by Standard and Poor’s of AA (COIT Lease Bonds) or AA+ (PAC Bonds) basically offsets the impact anyway.  All of the Carmel bonds issued after 2010 carry only the Standard and Poor’s rating.”

Clerk-Treasurer Christine Pauley said Carmel need to be aware of this new methodology when considering adding new debt.

“The city is certainly increasing its debt burden,” she said. “We can certainly pay for that debt burden, but they’re saying the city needs to be very cognizant of placing the city under further debt.”

City Council President Ron Carter said he’s not concerned by Moody’s report and he suggested that other ratings agencies could be used instead in the future.

Matthes said that since 2010, Carmel has pursued only Standard and Poor’s Global ratings on their bond issues, because she said, “S&P better understands Indiana leases and finances, which generally results in higher bond ratings for most types of bond issues.”

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