Legal covenants are adequate, with an additional bonds test of 1.5x, and a rate covenant
In the first two of the three-notch downgrade, Moody's emphasized the failure of the utilities enterprise to set rates sufficient to meet bond covenants, noting weak rate setting resulted in five rate covenant
violations in the last five fiscal years.
Coverage levels are above the rate covenant
requirements, though remain consistently lower than in pre-recession periods.
The rate hike was necessary for the city to maintain its rate covenant
of 1.15x annual debt service without commensurate expenditure cuts, S&P credit analyst, Misty Newland, explained.
An important credit factor addressed in the indenture is the rate covenant
. The rate covenant
mandates that system administrators assess rates sufficient to generate revenues at a designated threshold level.
The most important of these are the rate covenant
, the additional bonds test, and the debt service reserve requirement.
While the MTI rate covenant
requires retention of a consultant for the first missed historical debt service coverage ratio below 1.20x, it also considers that failure to maintain an historical debt service coverage ratio of at least 1.0x for two consecutive years constitutes an event of default.
All outstanding bonds will be secured on parity under a master trust indenture, which carries a 1.2x rate covenant
and 120 DCOH liquidity covenant.
There is an annual rate covenant
of sufficiency (1.0x) and an additional bonds test of 1.2x pro-forma maximum annual debt service, based on an average of the last two fiscal years' operating results.
The security package is considered strong, with a 12-month cash funded debt service reserve fund (DSRF), and a 1.5x rate covenant
and additional bonds test (ABT).