WASHINGTON -- The lawsuit over the Richmond Unified School District's defaulted certificates of participation should not affect most other lease issues in California because the case is likely to focus on the constitutionality of the Richmond financing only, Moody's Investors Service said yesterday.
The rating agency's upbeat assessment of the implications of the investor lawsuit for the nation's largest leasing market comes one week after Standard & Poor's Corp. warned that it could have both broad and adverse consequences for lease financings there.
Standard & Poor's pointed to an argument used by the state-controlled district in defending the suit before a California superior court that the $9.8 million Richmond lease issue created long-term debt in violation of the state constitution. That argument, in effect, challenges the validity of all state lease financings, it said.
But Moody's vice president Jamie Burr said the state appears to have softened its stance in the last week, or at least has sought to clarify it. He attributed this to the scare raised by its use of what Mr. Burr called the "U" word, unconstitutional, as well as Standard & Poor's statement.
He said two of the state's attorneys general told Moody's it was their intent to call unconstitutional only the Richmond financing. "Certainly they are not looking to upset everything, and that gave us a great deal of comfort," Mr. Burr said.
The state intends to argue in the case that the Richmond transaction, which was structured as a leaseback of existing school property, created unconstitutional debt principally because the school district did not get the use of any new property from the financing, Mr. Burr said.
In the Richmond transaction, the district leased its existing adminstration building, central kitchen, and warehouses to the certificates investors, who prepaid their rent in full and leased back the buildings to the district. The proceeds were then used in large part to finance the district's operating deficit.
Mr. Burr said that while California courts have had a long history of upholding the constitutionality of lease financings, the state attorneys general believe they can induce the courts to carve out an exception to that rule for the Richmond financing.
Michael E. Hersher, the deputy general counsel of the state education department who penned the constitutional argument, also has said he hopes the court will "draw the line" against deficit financings like Richmond's which the state finds particularly egregious.
While such a move by the court would limit any damage to leasing done by the case, it would most likely call into question a small number of other California school deficit financings done around the same time as the Richmond transaction in 1988 and 1989, Mr. Burr said.
None of the school financings were rated by Moody's, Mr. Burr said Richmond approached the agency to rate the defaulted issue, but was turned down because its finances clearly were in "frail" condition even in 1988. The deficit financing was an obvious warning sign of its plight, he said.
While Moody's has never graded such a deficit financing, he said, it has like Standard & Poor's rated many California leaseback transactions, or asset transfer financings, which are structured much like Richmond's. In most cases, however, the offerings are used to finance capital projects.
Both Moody's and Standard & Poor's said they intend to watch the Richmond case closely for developments affecting other California leases. But they both declined to take any immediate rating action, and Moody's went out of its way to say it would continue to rate asset transfer leases.
