NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the rating on the following Nevada University and Community College System, Nevada bonds, as part of its continuous surveillance effort:
--$6.5 million taxable lease revenue bonds, series 2002 at 'A-'.
The Rating Outlook is Stable.
SECURITY
The bonds constitute special, limited obligations of the University and Community College System of Nevada, also known as the Nevada System of Higher Education (the system), payable solely from and secured by an irrevocable pledge of construction rent in amounts sufficient to pay debt service on the bonds, received by the trustee pursuant to a lease agreement between the United States Government (the federal government) and the system. Payments subject to the lease terms are a general obligation of the federal government.
CREDIT SUMMARY
The 'A-' rating reflects the strength of the lease-rental agreement, the likelihood of continued payments by the lessee (the federal government) subject to abatement risk, as well as the expectation that the system will continue to maintain the leased premises to the standards required under the lease.
KEY RATING DRIVERS
Legal Structure Affords Adequate Protections: The bonds are secured by lease rental payments from the federal government to the system. The lease may only be cancelled under certain limited conditions, including failure by the system to maintain the facility in good repair, and inability to reconstruct the facility within two years in case of damage.
Lease Payments Subject to Abatement: Lease payments are subject to abatement in case there is damage to the building preventing or limiting occupancy by the lessee. The maintenance of property and casualty insurance, rental interruption insurance, and a 'lease bond' mitigate the abatement risk.
System Required to Maintain Property: The 'A-' rating factors in the general credit characteristics of the system, which is required to maintain the building in good repair, in order to avoid cancellation of the lease by the lessee.
WHAT COULD TRIGGER A RATING ACTION
'Lease Bond' Provides Necessary Liquidity Support: Failure to renew or replace the expiring letter of credit facility, in an amount sufficient to cover two years' worth of debt service, would expose the bonds to increased risk of payment disruption due to abatement.
CREDIT PROFILE
Legal Structure Affords Adequate Protections
The bonds are secured by a stream of monthly lease rental payments, equal to debt service, which are made by the U.S. Government General Services Administration (GSA), directly to the trustee. The pledged payments (termed 'construction rent') are a subset of a larger rental payment relating to the lease by the GSA, on behalf of the Department of Energy (DOE), of a portion of a building at the system's Desert Research Institute.
Bondholders do not have a security interest in the leased premises, nor does ownership transfer to the lessee at the end of the lease. Fitch considers the leased facility to be important to, but not essential to, the federal government as lessee. The DOE uses the building as a repository for Nevada Test Site documentation and records on radiation exposure and nuclear testing, a public information center, and a museum for artifacts and archeological materials found at the site. Federal law requires public access to these documents and collection and curation of the artifacts. The building was designed and constructed for this purpose.
Lease Cancellation Options Limited
The obligation by the federal government to make lease payments required under the lease is a general obligation, with only limited opportunity to cancel or abate. Favorably, the lease lacks some cancellation provisions typical of federal leases. The lease provides for cancellation only under limited and unlikely circumstances, such as damage to the building that the system cannot repair within two years. The GSA may also cancel the lease, if, in the event of damage, the system does not provide a plan for reconstruction and execute a related contract within 90 days of the casualty event.
The system's obligation is limited to operation and maintenance (O&M) of the leased premises, and creation and implementation of replacement plans in case of damage to the property. The lease and the bond resolution also require the system to maintain property and casualty insurance equaling the lesser of bond principal outstanding or the building's replacement cost.
Lease Payments Subject to Abatement
Lease payments are subject to abatement, commensurate with the loss of use of the facility, in the event of fire or structural damage. The legal documents require rental interruption insurance equal to one year's worth of debt service payments, which may not be adequate given the two-year repair/reconstruction provision. This concern is mitigated by the requirement of the system to procure a 'lease bond,' equal to two years' worth of lease payments, upon which the trustee may draw to make debt service or O & M payments, if lease payments are not received for any reason.
The system has secured a $2.1 million letter of credit (LOC) from Bank of America, expiring July 10, 2012, to fulfill this provision. The obligation to secure a 'lease bond' is subject to a reasonable cost and attainability clause. If the 'lease bond' is not renewed or replaced at the July 10, 2012 expiration, the risk of payment disruption due to abatement risk will increase.
System Required to Maintain Property
The 'A-' rating considers the general credit-worthiness of the system (certificates of participation rated 'AA' by Fitch), as the system is responsible to maintain the leased facility in good repair; failure to do so could trigger a cancellation of the lease and, thus, endanger debt service repayment. The risk of delayed lease payments, due to potential near-term federal government liquidity concerns is not considered in the rating, as reasonable liquidity support is presently provided by the 'lease bond' letter of credit.
Additional information is available at 'www.fitchratings.com'
In addition to the sources of information identified in the Tax-Supported Rating Criteria, this action was additionally informed by information from Bond Counsel, Trustee, Bank of America, US Federal Government.
Applicable Criteria and Related Research:
'Tax-Supported Rating Criteria', dated 16 Aug. 2010.
'U.S. Local Government Tax-Supported Rating Criteria', dated 08 Oct. 2010.
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548605
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564566
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