Bonds

Bolingbrook, Illinois, was downgraded seven notches by S&P Global Ratings, which cited the Chicago suburb’s unwillingness to cover shortages on unrated sales tax revenue bonds as a management and governance risk.

The village of 73,000said the downgrade “sets a harmful and disruptive precedent for any credit secured by specific revenues that do not pledge the taxing power of the related municipality.”

S&P cut the village’s underlying GO rating to BBB-minus from AA Thursday as rebuke for failing “to support a capital obligation” by missing five sinking payments owed on a January 2024 term bond from the $47.7 million unrated 2005 issue.

The bonds are secured by sales tax revenues in a specially designated area for a retail development project. The missed sinking fund deposits that began in 2020 were disclosed in October by the bond trustee and trigger an event of default under the bond indenture.

“The likelihood of default upon the term bonds maturity results in a weaker management assessment for the village under our criteria,” S&P analyst Andrew Truckenmiller said. “As a result of the weaker management score, our rating on the village’s GO debt is capped” at BBB-minus. The village has $200 million of direct debt. The outlook on the GOs is stable.

The village government told S&P that pledged revenues will likely fall short of meeting both the 2024 and 2026 term maturities and the village lacks a formalized plan to use other available resources to satisfy the debt service obligations.

Those factors drive a weaker management assessment and raise governance risk under S&P’s local government criteria with Bolingbrook labeled as “vulnerable” under those metrics.

“The recurring events of default under the trust indenture and the likelihood that the village will default upon the term bonds maturity represents a weak risk management, culture, and oversight governance in our opinion,” Truckenmiller said. “In our view, the 2005 sales tax bonds are obligations of the village and a lack of support for them reflects weak governance practices.”

S&P’s local government GO rating methodology which has been in place since 2013 guided the action and has resulted in similar actions for other GO credits, analysts said.

Environmental, social, and governance credit factors for the change fall under “risk management, culture, and oversight.”

Village officials criticized S&P’s decision and appealed the rating committee’s decision when first notified.

“The village disagreed with S&P’s application of its ‘U.S. Local Governments General Obligations Ratings’ methodology and provided substantial evidence of why negative performance on a standalone credit unrelated to the village’s issuer credit rating should not impair its ICR on appeal. S&P denied that appeal,” said a statement emailed by village Finance Director Rosa Cojulun.

The statement noted that the unrated bonds were sold to sophisticated buyers based on the project’s risk and limited scope of the pledge and that the limited offering memorandum included substantial language disclosing that the bonds are neither a debt, liability, general obligation or even a moral obligation of the village.

The Series 2005 bonds paid interest rates of 5.75%, 6.25%, and 6% on 2015, 2024, and 2026 term maturities, respectively, and are also not subject to any continuing disclosure rules.

“The village believes S&P’s rating action attempts to cause a de facto conversion of the Series 2005 Bonds to a general obligation of the village by force of its downgrade,” the statement read. “The village believes this is a misapplication of its rating criteria and further sets a harmful and disruptive precedent for any credit secured by specific revenues that do not pledge the taxing power of the related municipality.”

The village statement goes on to say it would consider using general revenues to cover the shortages a “poor financial management” that “would benefit a few sophisticated investors to the detriment of thousands of taxpayers in the village of Bolingbrook.”

The bonds were issued to help finance a retail center anchored by a Bass Pro Shop and a Macy’s, as part of a sales tax district that also included an already operating Ikea store, the offering memorandum said.

Pledged revenues have fallen short of projections needed to meet debt service demands and reserves have been exhausted leading to a shortage of approximately $2.6 million, according to S&P. About $20 million remains outstanding.

The village holds a healthy general fund balance of $50 million which is equal to 64% of revenues, so “the village’s lack of action to support the 2005 sales tax revenue bonds reflects an unwillingness, not an inability, to pay debt service on time and in full,” S&P said.

The report gives the village high financial marks but “very weak management” and “very weak debt and long term liabilities” grades.

S&P said Bolingbrook’s rating may be downgraded to junk if debt service is not paid in full on the sales tax revenue bonds or if the fallout from the potential 2024 term bond default pressures the village’s operations, budgetary flexibility, or liquidity profile.

S&P could lift the BBB-minus cap and reward the village with a multi-notch cap if officials demonstrate a willingness to pay all debt service requirements in full and on time.

S&P noted that many of the GO issues carry bond insurance from Assured Guaranty.
“It would be safe to assume this credit will have difficulty gaining market access in the future,” said Michael Pietronico, chief executive officer at Miller Tabak Asset Management, who had noticed the missed sinking fund deposits but does not hold Bolingbrook bonds.

Moody’s assigns its A2 underlying rating to Bolingbrook GOs.

The Bolingbrook situation provides a reminder of the risk for investors associated with narrow pledges for project financings that don’t carry a GO or appropriation pledge and the risk for borrowers who might believe their GO is insulated and won’t suffer any fallout if a project financing falters.

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