CHICAGO -- Moody's Investors Service yesterday downgraded to Caa from A $39 million of outstanding Polk County, Iowa, industrial revenue bonds after bondholders did not receive a $2 million semiannual principal and interest payment due Dec. 1.

A Caa rating denotes a default. The rating agency also placed the county's Aa-rated $22 million of outstanding general obligation debt under review, according to Jamie Burr, a Moody's vice president and assistant director for legal analysis.

Mr. Burr explained that the Caa rating is due to a default on the bonds that was caused when the Racing Association of Central Iowa -- the operator of Prairie Meadows racetrack in Altoona -- filed for bankruptcy last Wednesday, causing an automatic stay on its assets.

The racing association had been scheduled to make a $2 million payment to the trustee -- First Trust National Association of St. Paul, Minn. -- last Wednesday. Although the racing association is responsible for paying the annual debt service on the bonds, Polk County is obligated under a lease purchase agreement to make up the difference between the $4 million of annual debt service payments and track revenues derived from a 6% wager tax.

The county's $1.75 million share of the debt service payment that was due last Wednesday was placed in an escrow account, pending the actions of the bankruptcy court, according to James Koolhof, Polk County manager.

The racing association filed for Chapter 11 bankruptcy protection in federal court the day after the Polk County Board of Supervisors voted not to provide an operating subsidy of up to $5.5 million for a live racing season next year, according to Connie Newlin, vice president and general counsel of the racing association.

Mr. Koolhof acknowledged that the county board's action made the association's bankruptcy filing "inevitable," but he added that Polk County is under no legal obligation to subsidize the racetrack's operations. He said the county has spent $9.3 million on subsidies since 1989.

David Bluhm, a First Trust vice president, verified yesterday that the racetrack bonds were in default. He added that lawyers for the trustee would be meeting soon with lawyers for the racing association and the county to discuss the situation, but he declined to outline possible actions the trustee could take.

Some Iowa public finance officials have said the county, by denying a subsidy to the racetrack, is attempting to shut down the facility it financed to force the trustee to lower the interest rate on the outstanding bonds.

If the racetrack does not operate next year, Mr. Koolhof said the county could exercise a "calamity clause" in the bond indenture that would allow the redemption of the bonds prior to the Dec. 1, 1997 optional call date if the racetrack does not hold live racing for 12 consecutive months.

He said if bonds are called early, the county would issue GO bonds and use the proceeds to pay off the racetrack bonds.

County officials had warned last month that they would not consider providing an operating subsidy to the racetrack for next year unless interest rates on the outstanding bonds were lowered. The bonds, which carry an average interest rate of 8.5%, mature in 2014.

Mr. Koolhof said the county, racing association, and First Trust have had "a couple of discussions" regarding the interest rate on the bonds, but added that no agreements came out of the talks.

As for the county's GO rating, Mr. Koolhof said the racetrack issue has to be resolved before Moody's would consider an upgrade.

In July, Moody's downgraded the county's $22 million of outstanding GO debt to Aa from Aaa, citing a "lack of willingness to implement long-term alternatives to general fund subsidization of Prairie Meadows racetrack and debt service."

At the same time, the agency downgraded the rating on the racetrack bonds to A from A1. Standard & Poor's Corp. rates the county's GO debt AA, but does not rate the racetrack bonds.

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