S&P: Memphis, TN Debt Upgraded To 'AA' From 'AA-' On Application Of New Criteria; Outlook Stable; 2018 GO Debt Rated 'AA'

S&P Global Ratings has raised its rating on the City of Memphis, Tenn.'s non-ad valorem debt one notch to 'AA' from 'AA-' The outlook is stable.

"We base the upgrade on the application of our Issue Credit Ratings Linked to U. S. Public Finance Obligors' Creditworthiness criteria," said S&P Global Ratings credit analyst Kristin Button.

Based on this criteria we rate Memphis's non-ad valorem tax debt on par with our rating on Memphis based on the city's general creditworthiness as reflected in the rating on the unlimited-tax general obligation (GO) bonds. (For further information see criteria published Jan. 22, 2018, on RatingsDirect. )

S&P Global Ratings also assigned its 'AA' long-term rating to the city's series 2018 GO bonds and affirmed its 'AA' long-term rating on the city's existing GO debt. The outlook is stable.

A pledge of the city's full faith and credit to levy ad valorem property taxes without limitation as to rate or amount secures the GO bonds.

The upgrades affect the following debt:

Economic Development Growth Engine Industrial Development Board of Memphis and Shelby County's series 2017B and 2017C tourism development zone (TDZ) revenue refunding bonds secured by a subordinate lien on sales tax revenues in the TDZ and a pledge by the City of Memphis to fund any insufficiencies with legally available non-ad valorem tax revenues. We have also applied our Multiple Revenue Stream criteria to the bonds because pledged revenues are from multiple revenue sources and we use the strong link approach because there is one obligor. Memphis Center City Revenue Finance Corp.'s series 2014A and 2014B sports facility revenue bonds secured by user fees and certain sales tax rebates and if these are insufficient, bondholders have a pledge from the city to make debt service payments from legally available non-ad valorem taxes. Memphis and Shelby County Port Commission's series 2011 development revenue bonds (Electrolux project) secured by a 50/50 obligation of the City of Memphis and Shelby County to make debt service payments from legally available non-ad valorem taxes. We have also applied our Multiple Revenue Stream criteria to the bonds using the weak link approach because there is more than one obligor and the city and county are not joint and several. Memphis and Shelby County Sports Authority's series 2007C, 2007D, 2009A, and 2009B sports facility revenue bonds secured by various revenues (arena seat sales, hotel occupancy taxes, payment in lieu of taxes from the city's light and gas utility system and car rentals). In the event these revenues are insufficient to make annual debt service and the debt service reserve fund is used to make up the shortfall, the City of Memphis and Shelby County have pledged 50/50 to replenish draws on the reserve fund from legally available non-ad valorem taxes. We are applying the new ratings linked criteria based on the non-ad valorem tax pledge and not as a moral obligation because the reserve replenishment is a covenant and not subject to appropriation by each party. We have also applied our Multiple Revenue Stream criteria to the bonds using the weak link approach because there is more than one obligor and the city and county are not joint and several. The 'AA' long-term ratings reflect our assessment of the city's:

Adequate economy;Very strong management; Adequate budgetary performance; Very strong budgetary flexibility; Very strong liquidity; Very weak debt and contingent liability position; and Very strong institutional framework score. The stable outlook reflects our expectation that the city's financial management practices will remain strong, which will allow Memphis to maintain very strong budgetary flexibility. We believe the rating is constrained by the city's high debt service, pension, and OPEB costs, which we anticipate will remain elevated. For these reasons, we do not expect to change the rating within the two-year outlook horizon.

Improvement in the city's weak debt and contingent liability profile and substantial improvement in wealth and income levels could result in a higher rating.

Significant deterioration in the city's budgetary performance or budgetary flexibility, because of significant rising costs, could result in a lower rating.
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