Minnesota City Rating Cut 8 Steps After Ending Arena Payment

Vadnais Heights, a Minneapolis suburb, had its general-obligation rating cut to junk by Moody’s Investors Service after the City Council voted to stop allocating payments to a sports center financed by bonds.

The eight-step downgrade to Ba1, one step below investment grade, follows similar action by Standard & Poor’s, which lowered the rating a total of 12 levels in July and August.

The council voted to end the city’s lease agreement and stop appropriating funds for the 200,000-square-foot sports center, whose construction was financed by proceeds of a bond sale. Revenue from the complex fell short of expectations, and Vadnais Heights, a community of 12,453, was responsible for making up the difference.

“The city’s failure to appropriate represents a significant lack of willingness to pay on a lease obligation that supported debt issued in the capital markets,” Moody’s analysts said in a report.

The city’s Economic Development Authority sold debt on behalf of Community Facility Partners Vadnais Heights LLC, a private, nonprofit corporation, to finance the sports center. S&P on Aug. 21 cut the $25 million of lease-revenue bonds by 13 steps to CC from A-. Moody’s doesn’t rate the debt.

Vadnais Heights is still obligated to cover the sports center’s revenue shortfalls through Dec. 31. The amount the city will have to pay through year-end may be from $500,000 to $900,000, said Joe Murphy, a council member since 2007.

On Hook

Including those payments, the city will have paid from $1.3 million to $1.9 million to the sports center since it opened in 2010, according to Murphy. Vadnais Heights proposed a $4.9 million 2012 budget, according to the city’s website.

The downgrade is “not fair and it’s not reflective of the overall financial condition of our city,” Mayor Marc Johannsen said in a telephone interview. “We’ve never missed a bond payment in the history of the city, and we’ll never miss a bond payment that we’re obligated to do.”

The city has no plans to change its decision about appropriating funds, Johannsen said. A reversal could raise the city’s general-obligation rating, according to Moody’s.

“The lease agreement expressly provides the right to terminate the lease upon non-appropriation of funds,” according to a statement issued by Vadnais Heights. “The city’s actions will not impact the current operation of the center or its current use agreements. It remains open and welcomes all existing and future users.”

The sports center offers two National Hockey League-size ice rinks, 1.5 soccer fields, three batting cages, two volleyball courts and a 100-meter track, according to its website.

Vadnais Heights general-obligation bonds haven’t traded since the rating cuts. A bond sold by the development authority maturing in 2036 traded Aug. 31 at an average yield of 15.2 percent, up from 5.3 percent on Aug. 20, the day before the S&P rating cut.

To contact the reporter on this story: Brian Chappatta in New York at bchappatta1@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net

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