July 10 (Bloomberg) -- La Grange, a small Kentucky city that backed debt used to buy land for commercial development that mostly never occurred, had its credit rating cut five steps to junk by Moody’s Investors Service, citing a risk of default.
The Oldham-La Grange Development Authority hasn’t been able to sell most of 1,000 acres it acquired with financing from a 2005 bond backed by the city of about 8,000 residents, Moody’s said in a statement. Without proceeds from building on the land, La Grange may be forced to make an $8.1 million payment in June 2015, and may default after a tax proposal failed, Moody’s said.
“Obviously my City Council doesn’t understand the ramifications of what’s going to happen,” La Grange Mayor Bill Lammlein, 68, said by telephone. Moody’s cut its score on La Grange debt to Ba2, two levels below investment grade, from A3, seventh highest, on July 8.
La Grange joins municipalities such as Vadnais Heights, Minnesota, and Moberly, Missouri, whose debt fell into junk territory after backing economic development projects that failed to perform as forecast. Vadnais Heights backstopped a local sports center while Moberly supported development of an artificial-sweetener plant. Moody’s has called such municipalities that drop to junk status “fallen angels.”
In La Grange, about 25 miles (40 kilometers) northeast of Louisville, Lammlein’s proposed payroll tax would have raised $600,000 a year, enough to refinance the municipality’s bonds and cover debt service.
The development authority refinanced the 2005 debt last year, saying by that point, only Rawlings Co. had developed a portion of the site, building a 155,000-square-foot headquarters for 550 employees that opened in 2007.
Moody’s has a negative outlook on La Grange, indicating another cut may be made. The downgrade this week affected $11 million in debt, the company said. The last time an investor bought an authority bond that matures in June 2015 was in October, with a yield of about 2 percent, according to data compiled by Bloomberg.
Debt issued by Oldham County, where La Grange is the county seat, isn’t rated by Moody’s. Standard & Poor’s grades it AA, third highest.
La Grange’s rating could be raised if its tax revenue increases or if it finds a way to refinance the debt, Moody’s said. Lammlein said he plans to resubmit the payroll levy plan.
“This struggle isn’t over yet,” the mayor said.
“We could do away with our police department, our public works department, but we wouldn’t be much of a city anymore,” Lammlein said. “We’ve got to make good on our promise.”
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