Bond Ratings Lowered for Some Gulf Coast School Districts

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The creditworthiness of several school districts in Louisiana and Mississippi has taken a hit in the aftermath of the devastation caused last August by Hurricane Katrina, according to a recent report by Moody’s Investor Service.

Downgrades in the credit ratings that the New York City-based rating firm assigned to districts and other government agencies in the Gulf Coast region had been expected because of Katrina’s disruption of sales- and property-tax revenues and the uncertain outlook for recovery.

The ratings are the analysts’ opinions about the ability of bond issuers to repay the debt. Lower credit ratings result in higher interest rates, and thus increase the cost to districts of issuing bonds to build and repair schools. ("Bond Ratings Another Worry for Gulf Coast Districts," Dec. 7, 2005.)

‘Speculative’ Status

The Dec. 21 report from Moody’s, one of three major bond-rating firms, downgraded the ratings of three school districts in Louisiana and four in Mississippi, although the ratings of two other districts in the region did not change. (See table below.)

Furthermore, the outlook for the nine districts was described in the report as either “uncertain” or “negative,” signaling that the ratings could be changed further.

Change of Status—Bond Ratings After Katrina:
Moody's Investors Service has placed nine Louisiana and Mississippi school districts on its credit "watch list" since Hurricane Katrina, and has lowered the bond ratings for some.
Bond Issuer Previous Rating Status Current Rating Status
Jefferson Parish A3 A3
Plaquemines Parish A3 Ba2 (Downgraded)
St. Bernard Parish Baa1 Ba2 (Downgraded)
St. Tammany Parish Aa3 A1 (Downgraded)
Biloxi A2 A3 (Downgraded)
Gulfport A3 A3
Hancock County A2 A3 (Downgraded)
Harrison County A2 A2
Pass Christian Baa2 Baa3 (Downgraded)
Note: Moody’s rates bonds at “investment grade”—Aaa, Aa, A, Baa—and “speculative grade”—Ba, B, Caa, Ca, C—with further subdivisions for each grade numbering 1, 2, or 3.
SOURCE: Moody’s Investor Service

In Louisiana, bonds for both the 3,000-student Plaquemines and 8,800-student St. Bernard parish districts slipped below investment-grade ratings to speculative grades—an important shift, because some institutional investors do not buy bonds that are not investment-grade. Moody’s downgraded the Plaquemines Parish district from A3 to Ba2 on $11.8 million in bonded debt.

The St. Bernard Parish district saw its rating decline from Baa1 to Ba2, on $3.1 million in debt.

In the 32,000-student St. Tammany Parish district, the credit rating on $175.8 million in debt was dropped from Aa3 to A1, “reflecting the challenges the district will face in view of its substantial reliance on state funding,” Moody’s said.

The firm added that the district has a negative outlook based on doubts that enrollment will recover to previous levels, and concerns that changes to the state finance formula could further reduce the district’s funding.

Meanwhile, the 46,000-student Jefferson Parish district, adjacent to New Orleans, kept its A3 rating on its $423 million in bonded debt, reflecting “strong debt-service coverage that, at least for the near term, appears to remain healthy,” the report said.

The report did not cover the New Orleans school district, because that district has never asked Moody’s to evaluate its underlying creditworthiness, said Douglas Benton, a senior credit officer at Moody’s Dallas office.

When school districts issue bonds, they often obtain a higher rating than they would otherwise by purchasing bond insurance, a step the New Orleans district has taken. On Sept. 1, just after Hurricane Katrina struck, the district missed payments totaling nearly $9 million on some of its outstanding debt, though its insurance company covered the default, which the district has repaid.

Further Review?

In Mississippi, the school districts of Biloxi, Hancock County, Harrison County, and Pass Christian all saw a ratings decline in the Moody’s report.

The 6,200-student Biloxi district’s rating was lowered from A2 to A3, on $70.3 million of outstanding debt. On the positive side, the report said, the district had an insurance policy to protect against interruption in its gambling revenue from riverboat casinos, and an approximately $3 million insurance payment was expected to offset the expected losses over the coming year.

The 6,000-student Gulfport district maintained its A3 rating on its $8.7 million in outstanding bonds, even though hurricane damage occurred throughout the city and coastal areas, tax revenues from casinos declined, and student enrollment dropped to 85 percent of the pre-Katrina level.

Moody’s said it would revisit local governments’ credit ratings in the hurricane-affected region as the agencies absorb the revenue declines resulting from property losses and business closures.

Vol. 25, Issue 18, Page 12

Published in Print: January 11, 2006, as Bond Ratings Lowered for Some Gulf Coast School Districts
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