UPDATE 1-S&P puts some Hercules, Calif. debt on watch negative

Wed Oct 3, 2012 4:26pm EDT

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Oct 3 (Reuters) - Standard & Poor's Ratings Services placed
the 'BB' rating of some Hercules Public Financing Authority,
California, revenue bonds on CreditWatch with negative
implications, citing uncertainty over the city's willingness to
repay some debt.
    "The CreditWatch placement reflects our uncertainty
surrounding the city's willingness to pay its obligations after
the city's statement in a September 25, 2012, material event
notice," said S&P on Tuesday.
    The rating agency placed on credit watch with negative
implication the 2010 electric system project revenue bonds,
series 2012 electric system project revenue refunding bonds,
series 2003B lease revenue bonds and series 2009 taxable lease
revenue bonds issued for the city of Hercules. 
    The debt service payments of these bonds are secured by a
city covenant to advance funds to cover the net electric system
revenue. 
    Hercules, about 10 miles south of Vallejo, which last year 
emerged from three years of bankruptcy, said in its material
event notice that it "does not anticipate there will be any
available funds to make such advances in the foreseeable future
and does not expect to make any such advances."
    Hercules Deputy City Manager Liz Warmerdam said debt service
payments will come from an enterprise fund for the city's
Hercules Municipal Utility, which received the proceeds of the
two bond series.
    "We're just saying the city is not going to do it," said
Warmerdam, adding that Hercules is trying to sell its utility.
    "In a best-case scenario we would receive enough proceeds to
defease the debt," she said, adding that the utility has about
$13 million in outstanding debt.
    Voters in Hercules in June approved a measure to authorize
the sale of the Hercules Municipal Utility so the city will not
have to subsidize the utility.
    Proceeds from the sale would be used to repay the utility's
debts and other contractual obligations. Any remaining proceeds
would go to the cash-strapped city's general fund.
    S&P has had Hercules under intense scrutiny this year after
a $2.4 million bond payment by its now defunct redevelopment
agency went into default.
    That triggered a lawsuit by Hercules' bond insurer, Ambac
Assurance Corp. It claimed redevelopment agency revenue pledged
to bondholders had been improperly diverted to city needs.
    Ambac has settled the lawsuit, noting it received security
in two city properties with values estimated in excess of the
revenue at issue in the suit.
    Hercules has suffered a steep decline in revenue in recent
years, forcing it to slash its spending, workforce and services.
To help fill the city's coffers, voters in June approved a
measure to increase the local sales tax in addition to the
measure authorizing the sale of their utility.
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