Moody’s Investors Service has downgraded to A3 from A2 the rating on the City of Jackson’s water and sewer system revenue bonds, affecting approximately $233.7 million. The outlook remains negative, Moody’s said in a report issued Wednesday.
The A2, or Aa, is second on a scale of ratings that start at Aaa and go from there to Aa A Baa Ba B Caa Ca C, with each progression denoting higher debt risk.
The Jackson downgrade reflects the projected deterioration of financial performance in fiscal 2015 and 2016 following improvement in fiscal 2014. The downgrade also reflects the long-term pressures on the system’s finances stemming from mandated outsized capital needs coupled with historically inadequate rate management practices, Moody’s said.
Additional considerations include the system’s sizable customer base, weak socioeconomic profile, economic stability provided by institutional presence, and limited concentration within the top customers.
The negative outlook reflects the ongoing challenges relating to the system’s outsized capital needs and the uncertainty surrounding its financial position and ability to absorb additional debt. The outlook further considers the potential loss of a large wholesale customer in approximately five years which could result in a 7 percent decrease in revenues.
In citing factor that could lead to an upgrade, Moody’s said Jackson must show a trend of improved financial performance including strengthened coverage ratios and bolstered liquidity. Further strengthening, could come with demonstrated adherence to a multi-year, comprehensive plan to address federal consent decree requirements and aging facility infrastructure, while maintaining key financial metrics.
However, a further downgrade could occur with a failure to maintain adequate debt coverage ratios and a continued decline in financial flexibility, whether for capital or operational needs.
Significant additional leverage of system assets and/or revenues would also risk a downgrade.
Jackson’s water and sewer system serves an area of about 150 square miles, including Jackson and portions of Hinds, Rankin and Madison counties. The system served 58,919 water and 49,494 sewer customers in fiscal 2014. Residential accounts constitute about 88 percent of the customer base.
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