NEW YORK--(BUSINESS WIRE)--Fitch Ratings has downgraded the Wells Nelson & Associates, LLC certificates of participation (COPs), series 2010A to 'AA' from 'AAA' and resolved the Negative Watch. The Rating Outlook is Stable. The rating of the series 2010A COPs is anchored by a Department of Interior Bureau of Indian Affairs (DOI BIA, rated 'AAA' with a Stable Outlook by Fitch) guaranty for 100% of any principal, accrued interest and authorized charges of the loan to the lender, providing relative payment stability during normal business operations. The existing interest reserve should be sufficient to cover interest due following a claim with the DOI BIA; however, the potential for timing lags, clawbacks or preference payments as well as a reliance on transaction counterparties for repayment tempers the rating to 'AA'.
KEY RATING DRIVERS
Operation and Revenue Risk Mitigated: The COPs benefit from a guaranty by the Shawnee Tribe of Indians of Oklahoma (the Tribe) and the DOI BIA. The COPs were issued to fund completion of the Li-Si-Wi-Nwi (LSWN) Health Center, located in central Oklahoma. LSWN provides access to healthcare services for several counties in Oklahoma, demonstrating its relative importance in the area. Ultimately, a joint venture agreement with the Indian Health Service (IHS) as well as the guaranty by the Tribe on the COPs mitigates operating and revenue risk due to the obligation of the DOI BIA to make debt service payments, subject to certain limitations discussed further below.
Limited Guaranty Structure: Under the structure of the debt issuance, DOI BIA provides a guaranty for 100% of any principal, accrued interest and authorized charges of the loan to the lender, collectively, BancFirst, Shawnee, Oklahoma and CornerStone Capital Investments, LLC. The DOI BIA guaranty does not guarantee any loss as a result of an LSWN default or directly guarantee payments on the rated debt. In addition, the lack of timing requirements heightens the risk of repayment on the COPs. While the existence of a debt service reserve helps to temper this risk, the COP rating cannot be directly linked to that of the DOI BIA due to the uncertainty regarding payment timing and the lack of clarity in terms of priority of payments.
Debt Service and Counterparty Risk: The borrower, LSWN, provides for a 1.25x debt service coverage ratio (DSCR) on an annual basis under the terms of the loan documents, based on third party revenue streams from the Tribe's healthcare facilities. Operating expenses are covered by the IHS. While an important indicator of borrower and counterparty health for the COPs, DSCRs do not provide a meaningful measure of stability for the debt, given the existence of the BOI guaranty.
Adequacy of Liquidity: An interest reserve fund sized at $520,000 does not fully cover all potential losses as a result of the lack of terms under which payments on the COPs will be made. The reserve is only available to pay accrued interest on the COPS after a submitted claim to the DOI BIA by the lender, creating a potential timing lag beyond the period during which accrued interest is covered. Further, proceeds under the guaranty are first paid to the lender and then distributed to the COPs, creating a reliance on the lender to transfer funds. The risk for clawbacks and preferential payments by the DOI BIA is mitigated by losses covered by the DOI BIA and the likelihood of a bilateral determination process rather than a formal bankruptcy proceeding.
Rating Inconsistent with U.S. DOI: Due to the limitations on the guaranty discussed above, the rating of the COPs is not set to the same level as the guarantor. While the guaranty does present significant benefits above that of the Tribe guarantee, especially when considering recovery, this benefit is limited to the 'AA' level rating.
Negative - Counterparty Downgrade: A downgrade the rating of the United States would result in a downgrade of the COPs. Similarly, deterioration in the credit quality of the Tribe's healthcare operations could result in a revised rating on the COPs.
Fitch placed the rated COPs on Rating Watch Negative on Sept. 12, 2014 following additional analysis into the timing and certainty of payments under the DOI BIA guaranty. The terms of the guaranty do not provide for payment certainty under a borrower bankruptcy scenario, limiting the benefit of the guaranty to below the 'AAA' level.
For analytical purposes, Fitch has assumed that, upon default, and following the maximum 90-day claim period with the DOI BIA, the DOI BIA will make a determination within an additional 90-day period. Following a determination, funds may be delayed by an estimated 30-day period, resulting in necessary liquidity of 120 days, as interest during the initial 90-day period is covered by the DOI BIA. Under this scenario, the existing $520,000 interest reserve (equal to roughly 125 days of interest during the maximum annual debt service year) is sufficient to cover interest due during the period after a DOI BIA claim. The potential for bankruptcy proceeding delays, clawbacks and preference payments as well as the reliance on BancFirst as the lender and guaranty recipient under the transaction documents limits the rating to the 'AA' level.
The DOI BIA guaranty differs from that of other Fitch-rated U.S.-guaranteed ratings such as those under the Department of Energy (DOE) program. Under the DOE program, the loan is serviced by an independent third party with a reserve established outside the estate of the borrower. In addition, the loan documents account for the inability to have the funds reduced as a result of preference payments or clawbacks and include provisions for timing. If payments are made late, accrued interest is paid by the DOE to the payment date and limits this administrative delay to 70 days. Typical project financings include debt service reserves sized to six months of principal and interest.
The DOI BIA guaranty provides for 'any loss of principal, accrued interest, and authorized charger the lender sustains' on the COPs. However, the repayment on the 2010 COPs is reliant on an unrated entity, BancFirst, to funnel funds received under the DOI BIA guaranty to the rated debt. The lack of an established timeline for such a claim as well as the potential for additional timing lags discussed earlier results in a rating below the 'AAA' guaranty level.
The COPs are secured by an undivided interest in the accounts receivable, rights to settlements, real assets and buildings, money held in reserves, the DOI BIA guaranty, the Tribal guaranty, and in the event of default under the lease, any money received by the lender from the sale or sublease of the project.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Rating Criteria for Infrastructure and Project Finance' (Jul. 12, 2012).
Applicable Criteria and Related Research:
Rating Criteria for Infrastructure and Project Finance