WASHINGTON -- Armed with double-A ratings from two credit agencies, the Virginia College Building Authority this week will sell the state's first public lease offering since the state Supreme Court withdrew its April decision invalidating lease and appropriation-backed debt.
Moody's Investors Service and Standard & Poor's Corp. on Friday cleared the way for the remarketing of a $31 million college equipment offering by the authority by assigning the ratings. Eddie Moore, the state treasurer, had said Virginia would not proceed with the issue unless it obtained ratings for the issue.
These ratings actions indicate the agencies have at least partly lifted the credit watches that they announced shortly after the April 19 court decision. Standard and Poor's had said it would no longer rate Virginia lease-backed securities, while Moody's proclaimed a general alert in the wake of the decision.
In explaining the about-face, Jamie Burr, a Moody's vice president,00 said the court's June 4 order setting aside the April decision removes the "current risk of invalidity" for such lease securities.
The court has ordered a rehearing of the case, Dykes v. Northern Virginia Transportation District Commission, which found that debt backed by the promise of appropriations illegally circumvented the state constitution's debt restrictions.
Two types of securities issued commonly in Virginia -- lease-backed securities and contract appropriations bonds -- were believed to be affected by the now-defunct decision. In fact, state petitioners who requested the rehearing estimated the decision had thrown into question the legality of up to $2.3 billion of such oustanding securities.
The rehearing order was "highly unusual" and a "positive sign" that the court will reconsider the controversial opinion and, at the very least, make its next ruling prospective to avoid endangering the legality of outstanding securities, Mr. Burr said. If the court does not largely reverse its April stand, he said he expects state legislators to take remedial action to protect outstanding securities.
The latest pronouncements of the rating agencies vindicate some state officials, as well as the taxpayer litigants in the case, who contended that the April ruling should not have been construed so broadly as to endanger well-structured lease-backed offerings like the equipment issue.
"I never felt the decision touched on lease securities, but I'm not an attorney," Mr. Moore said. "The decision did not even use the word lease. It clearly talked about appropriation-backed financing but did not talk about lease financing in any negative way," he said.
Immediately after the ruling, bond attorneys said it endangered lease securities because, in most cases, they are backed the same kind of promise of appropriations as the $330 million Fairfax County road financing in the case. Another element that appeared to touch lease financings was the decision's finding that securities are the same as debt if an issuer's refusal to make appropriations causes a downgrading by the credit agencies.
But Mr. Moore said, "you have to look at the underlying credit differences between" the proposed contract appropriations-type road financing and most lease-backed deals. The road financing was not structured like a lease deal in that it did not, among other things, offer the parkway as collateral to investors. The source of their security was the county's pledge to appropriate debt service payments.
On the other hand, the equipment deal going to market this week -- like most traditional lease deals -- offers the equipment as collateral for the lessor and bondholders, and provides other traditional remedies in case of default such as repossession, he pointed out.
Mr. Burr agreed that the court primarily was aiming to eliminate loose contract appropriation deals such as the road financing, rather than lease financings. But the broad wording of its April decision -- perhaps unintentionally -- "threw its net quite wide" over lease deals, he said.