LOS ANGELES - Standard & Poor's Corp. cut its ratings to B on about $56 million of bonds issued by three Arizona irrigation districts, and warned that the ratings could go lower if bankruptcy actions are pursued.

The downgrades reflect continued financial stress at the districts, whose woes have attracted attention from various levels of government. To date, however, no comprehensive restructuring plan exists to ensure the districts' long-term viability, Standard & Poor's noted in a release.

All the downgrades apply to general obligation bonds that were previously rated BB-minus by the agency.

The cuts affect $26.9 million of Maricopa-Stanfield Irrigation & Drainage District GO bonds, series 1989; $25 million of Central Arizona Irrigation & Drainage District GO debt, series 1989; and about $4.1 million of New Magma Irrigation & Drainage District GOs, series 1984.

The three ratings remain on Creditwatch, but Standard & Poor's has revised the implications to negative from developing. The agency said it is concerned about potential bankruptcy filings if financial solutions to the districts' problems cannot be negotiated.

Standard & Poor's downgraded the three districts in May 1992, and lowered the New Magma rating again last May to bring it in line with the other two districts.

The districts receive water from the Central Arizona Project, which uses a system of canals to deliver water from the Colorado River for purposes such as farm land irrigation.

Part of the districts' problems stem from a weakened operating environment for cotton growers, reflecting lower cotton prices. Much of the districts' acreage is dedicated to cotton production.

The lower prices - combined with increased operating costs - meant lower profits for farmers. This in turn made it more difficult for some farmers to obtain crop financing and resulted in fewer acres being planted.

As a result, the districts' revenues fell, thereby increasing chances they could not make timely payments on all their obligations, Standard & Poor's observed.

Besides bond payments, the districts have obligations to the Central Arizona Water Conservation District for water supplies. They also have outstanding loans with the U.S. Bureau of Reclamation in connection with construction of their irrigation water distribution systems.

Attention to the problems facing some districts has prompted various Arizona officials to study restructuring options.

In October, the Central Arizona Water Conservation District unveiled a plan to provide water to irrigation districts at a lower than originally planned cost to help alleviate their financial pressures.

The move "helps out to some degree," said Jon Reichert, the Standard & Poor's analyst monitoring the local districts.

But Reichert's written reports stress that "a restructuring of the districts' federal debt is critical in order for them to remain economically viable."

For example, a major component of the Maricopa-Stanfield district's overall debt burden is its $75 million repayment contract with the Bureau of Reclamation, Reichert said.

The local Central Arizona irrigation district - which is a separate entity from the Central Arizona Water Conservation agency - has a $63 million obligation to the federal bureau under its so-called 9(d) repayment contract. The New Magma's federal obligation totals $18 million.

While seeking a restructuring of its federal contract, the New Magma district has been making "good faith" payments instead of the full semi-annual payments that are due, according to Standard & Poor's.

But the Bureau of Reclamation has determined to terminate New Magma's Central Arizona Project water service by the end of the year because of the partial payments.

The New Magma district is appealing the decision and is seeking a stay of its implementation. "If a stay is not granted by late December, the district could resort to filing for bankruptcy in an attempt to keep CAP water available to its farmers," Standard & Poor's said.

Standard & Poor's negative implications on the bonds of the local Central Arizona irrigation district also reflect "the increased likelihood that the district will file for bankruptcy within the next couple months as a means of restructuring its payment obligations," the rating agency said.

By contrast, the Maricopa-Stanfield district "has represented that it is not seriously considering bankruptcy at this time as a means of restructuring its payment obligations," Standard & Poor's said. But that option could become more attractive if other districts successfully restructure their payments through bankruptcy fillings, the rating agency added. To date, the Bureau of Reclamation "has been unwilling to accommodate a restructuring" of the districts' contract payments, Standard & Poor's said

Sources said further discussions among various water officials are possible in coming weeks, but it is uncertain if the talks - if they take place - will bear fruit.

Standard & Poor's said the long-term rating outlook will remain negative without some kind of restructuring of the federal payments.

The agency also said it will lower its rating to CCC on any district that files for bankruptcy protection.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.