NEW YORK--(BUSINESS WIRE)--Fitch Ratings has placed the 'AA-' rating on $38,310,000 of limited obligation sales tax bonds, series 2015A (Chilton County Hospital Project) on Rating Watch Negative.
SECURITY
The bonds are a limited obligation of the authority payable from a first lien on the proceeds of a 1% general sales and use tax levied and imposed within the county. The bonds are also secured by a cash-funded debt service reserve fund (DSRF) equal to maximum annual debt service (MADS).
KEY RATING DRIVERS
Sales Tax Authorization Challenged: The Negative Watch is based on litigation filed against Chilton County and the Chilton County Health Care Authority which challenges the validity of the sales tax pledged to bondholders and seeks its repeal on procedural grounds. A motion to stay the lawsuit has been granted pending a ruling in a similar case being heard by the Alabama Supreme Court (Jefferson County v. Taxpayers and Citizens of Jefferson County).
Unfavorable Outcome Unlikely, But Potential Consequences Severe: Fitch believes that it is unlikely that the state supreme court will rule the tax invalid; however, the assignment of the Negative Watch reflects the severity of the potential outcome of the case, which is inherently unknowable. A ruling in favor of the plaintiff would effectively leave bondholders in an unsecured position. An event of default would be considered imminent or inevitable absent other action, leading to a 'C' rating.
Constitutional Amendment Uncertainty: A constitutional amendment on the November ballot will in effect ask voters to ratify all prior local laws including the Chilton County sales tax. Fitch will monitor the results of the election but also the retroactive application of the amendment, if successful. It is not clear to Fitch that the constitutional amendment alone would resolve the issue.
RATING SENSITIVITIES
Favorable Resolution of Litigation: Final resolution of the litigation pertaining to the legality of the pledged sales tax revenue in favor of the county and the authority would likely result in resolving the Negative Watch.
Sales Tax Repeal: Conversely, resolution that eliminates the sales tax without compensating action would likely result in a rating downgrade to 'C'.
CREDIT PROFILE
The Chilton County Health Care Authority is a public hospital corporation authorized to acquire, construct, install, and equip and operate health care facilities within the county. The bonds were issued to fund a new 30-bed general hospital to meet the healthcare needs of the county, which had not been served by a hospital since 2013.
The pledged revenue consists of a 1% general sales and use tax authorized by the Alabama Legislature in 2014 for the explicit and sole purpose of providing funds to pay the costs of construction, maintenance and operation of hospital facilities in the county. Imposition of the sales tax received overwhelming support from county voters at an advisory referendum in June 2014 (80% pass rate).
The legal challenge arises from a seemingly narrow and technical issue having to do with the composition of a majority vote in the state legislature. The vote appears to have been taken in accordance with rules of the legislature; the constitutionality of that rule is the subject of the challenge. It appears that the Alabama Supreme Court has considered a very similar question previously, and concluded that it is the prerogative of the legislature to define its own rules for quorums and voting. However, there can be no certainty that the outcome will be favorable to the authority and Fitch has no basis for reaching a definitive legal conclusion.
For background information, see 'Fitch Rates Chilton County Health Care Authority, AL's Sales Tax Bonds 'AA-'; Outlook Stable' dated Oct. 22, 2015.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from Lumesis and InvestorTools.
Applicable Criteria
U.S. Tax-Supported Rating Criteria (pub. 18 Apr 2016)
https://www.fitchratings.com/site/re/879478
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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1014162
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https://www.fitchratings.com/regulatory
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