In rare move, Moody's junks Collingswood debt (Update)

Moody's Investor Service has downgraded the credit rating of Collingswood, N.J.,  to Ba1, junk-bond status, a rare six-grade tumble from its previous A1 rating. Story in today's Inquirer here adds content. Earlier: 

The cut "reflects Moody's belief that Collingswood will be challenged to make payments within the next 30 days" on an $8.5 million loan guarantee for Lumberyard Redevelopment LLC's troubled LumberYard Condos development, Moody's wrote.

The money is owed to the Thrift Institutions Community Investment Corp. of New Jersey, which represents a group of banks led by the Brown family's Sun National Bank of Vineland, N.J., Collingswood mayor Jim Maley told me.  The agreement to pay down the loan “has been in place for a year,” TICIC President Gordon Ur told me. “We’re working with Collingswood” to arrange payment. “I have no idea why Moody’s reacted this way" at this time.

"It's nonsense," Maley, mayor since 1997 and an architect of the town's redevelopment efforts, told me. "Forbes Magazine just named us one of America's Top 10 transformed communities," thanks partly to Collingswood's involvement in financing property renovations. "We went through the same thing a year ago when the original construction loan was going to expire," he said, "and Moody's did nothing." He said he was confident the town would again be able to refinance its debt before the loan falls due next month.

"They are in a very different situation than they were last year," countered Moody's analyst Josellyn Yusef, when I asked. "The bank has pulled back their line of credit very significantly," forcing Collingswood to raise $4.5 million to partly pay down the loan. "They are being forced to access the credit markets for a short-term note." She and other Moody's officials declined to predict if this was likely to prove more expensive, or more difficult, than last year's refinancing.

Mayor Maley told me he's assured state officials that Collingswood faces "no dire consequences whatsoever" and a plan to raise the needed cash is in the works. The borough previously took over management of the development from builder John Costanza of Cherry Hill, whose office staff said he would have no comment. Maley told me the initial 51 units at the development, on the site of the former Peter lumberyard, sold out, along with at least 9 of the 24 units in a second complex, and that Collingswood is negotiating leases for unsold units that will allow it to pay down the debt.

The downgrade, to below investment-grade status, is Moody's judgment that the town has become more likely to default on its financial obligations. As a result, insurers, government agencies and other institutions may be less likely to want to own the Camden county town's borrowings, which could boost its financing costs.

Moody's downgraded less than 1 percent of the 18,000 U.S. communities it rates by as much as two notches in the past year and a half, managing director Jack Dorer told me, citing a recent report.

"This is unusual," agreed Alan Schankel, director of bond research at Janney Capital Markets in Philadelphia. He speculated Moody's may have acted because the dollar value of the loan is significant, compared to Collingswood's annual budget; similar default threats for projects in Philadelphia or other bigger communities would attract less notice.

Schankel also said rating agencies had become more "aggressive" with towns than in the past, adding that Standard & Poor's removed ratings on the East Rutherford and Pittsgrove, NJ school districts recently when they failed to provide data on schedule. The only recent previous multi-notch muni downgrade Frankel could recall was a move against DeKalb County, Ga., earlier this year when it briefly defied investor pressure to raise taxes to balance its budget, before reversing course.

Lumberyard  in 2006 agreed to build 116 condos and 21 stores at the site near the Patco train line. The developer planned to borrow $18 million to build the project, with the borough's financial guarantee helping keep borrowing costs down. But "the recent recession" has "left the developer struggling" to fill the units, even after cancelling the stores and scaling back the project to a $10 million loan, Moody's wrote in its downgrade report late Monday.

"Collingswood officials are currently negotiating an immediate extension of the loan" by the lenders' group, Thrift Institutions Community Investment Corp. of NJ, but the banks wants the borough to first agree to "purchase unsold condominiums" at the development, and to cut the debt by more than half, Moody's wrote.

Collingswood is trying to get a one-month loan extension so it can borrow money for the purchase price. If Collingswood fails, "the borough does not have sufficient cash" to pay the millions it owes, Moody's added.

Unless it can get the loan dates delayed, Collingswood faces millions in debt payments with just $1.24 million in cash on hand as of its last annual report, according to a report to clients by Janney's Schankel.