Delphi Community School Corp., IN 2019 Bond Rating Lowered To 'BB+' On Lack Of Internal Controls, Imbalance, Liquidity
CHICAGO (S&P Global Ratings) Nov. 20, 2019--S&P Global Ratings lowered its underlying rating four notches to 'BB+' from 'A-' on Delphi Community Multi School Building Corp., Ind.'s series 2019 ad valorem property tax first-mortgage bonds, issued for Delphi Community School Corp. The rating remains on CreditWatch, with negative implications, where it was placed on Aug. 23, 2019.
We assigned our 'A-' underlying rating on June 6, 2019. Subsequently, on Aug. 23, 2019, we placed the 'A-' rating on CreditWatch with negative implications, after becoming aware of an emergency cash-flow loan and the school board's decision to place the superintendent on paid leave. At that time, we indicated the CreditWatch placement reflected our view that these events could lead to a weakening of our view of the district's financial and liquidity positions, as well as our view of management conditions.
"The downgrade reflects our assessment of the implications of these recent events, including our discussions with district leadership," said S&P Global Ratings credit analyst John Sauter, "and more specifically, it reflects our view that the district has lacked effective internal controls and decision-making, and that this has contributed to a structural imbalance, significant management turnover since June, and a now-insecure liquidity position with a high level of near-term uncertainty compared to earlier in the year." In our opinion, the district's budgets have failed to address revenue and expenditure misalignment and relied on optimistic assumptions. While the previous management team stated it expected to re-establish balance and build the cash reserves in 2019, the deficit persisted and the district ultimately elected to take out a $1.5 million emergency cash-flow loan in August to meet payroll and daily expenses. In our view, it remains uncertain if the district will be able to repay the loan on Dec. 31, 2019 without additional support as its cash position worsens. The reserve position to end 2018 was adequate (6% of expenditures), but still below average and nominally thin. We anticipate reserves being very low to end 2019.
Based on our discussion with management, we also understand that leadership authorized the use of a new accounting software system during a period of transition in the finance team, which resulted in neither the board, outside consultants, nor the new finance team knowing how to effectively operate it. The district has since reverted to the prior system, but it is having difficulty reconciling accounts and assessing the current financial standing due to all the changes. The new interim superintendent and new treasurer report that they have not been able to reconcile month-end financial statements since July, but that they are close to closing August and September. This is impairing their ability to provide meaningful projections for financial performance and cash levels through the end of the year.
"The 'BB+' rating reflects our view of the heightened uncertainty around the district's financial position and ability to pay all its obligation on time," added Mr. Sauter, "and the negative CreditWatch reflects our view that we could lower the rating further, potentially by multiple notches, if reconciled financial statements and the year-end cash position indicate that the district may be unable to pay its obligations." Ratings in the 'BB' category, compared to those in the 'BBB' category, face major ongoing uncertainties or exposure to adverse business, financial, or economic conditions that could lead to the obligor's inadequate capacity to meet its financial commitments on its obligations. While management has indicated certainty about satisfying its end-of-year long-term debt service payments, it expressed uncertainty regarding the emergency loan. The loan is coming due at the same time as the long-term debt and is also payable from property taxes, making payment on long-term debt more uncertain, in our view.
The series 2019 bonds are secured by lease payments payable from ad valorem property taxes, subject to state circuit-breaker tax caps, but not subject to annual appropriation. Insurance provisions are in place to mitigate abatement risk. Bond proceeds are being used for various renovation and improvement projects, so the leased premise will remain in use and there are no construction risks. We rate the bonds at the same level as our view of the district's general creditworthiness, reflecting our view that lease risks are mitigated and that all resources will be used to service the debt.
RELATED RESEARCH
- Alternative Financing: Disclosure Is Critical To Credit Analysis In Public Finance, Feb. 18, 2014
- Criteria Guidance: Assessing U.S. Public Finance Pension And Other Postemployment Obligations For GO Debt, Local Government GO Ratings, And State Ratings, Oct. 7, 2019
Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. Complete ratings information is available to subscribers of RatingsDirect at www.capitaliq.com. All ratings referenced herein can be found on S&P Global Ratings' public website at www.standardandpoors.com. Use the Ratings search box located in the left column.
| Primary Credit Analyst: | John Sauter, Chicago (1) 312-233-7027; john.sauter@spglobal.com |
| Secondary Contact: | Anna Uboytseva, Chicago (1) 312-233-7067; anna.uboytseva@spglobal.com |
No content (including ratings, credit-related analyses and data, valuations, model, software, or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced, or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees, or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness, or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment, and experience of the user, its management, employees, advisors, and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process.
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.spglobal.com/ratings (free of charge), and www.ratingsdirect.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.spglobal.com/usratingsfees.
Any Passwords/user IDs issued by S&P to users are single user-dedicated and may ONLY be used by the individual to whom they have been assigned. No sharing of passwords/user IDs and no simultaneous access via the same password/user ID is permitted. To reprint, translate, or use the data or information other than as provided herein, contact S&P Global Ratings, Client Services, 55 Water Street, New York, NY 10041; (1) 212-438-7280 or by e-mail to: research_request@spglobal.com.