Credit agency: City's debt on garage raises worries

Standard & Poor's Rating Services is keeping a close eye on an important City of Reno credit rating as the city works through problems with debt on a downtown parking garage.

The problem, say analysts from Standard & Poor's, is this: If the hard-pressed city needs to dip into its general reserves to pay off the debt on the parking garage, it might face pressures when it comes time to repay other bonds.

"Currently, we believe the ability or willingness of the city to honor its debt obligations is uncertain," Standard & Poor's says.

Jill Olsen, the city's interim finance director, said last week the city continues to work toward resolution of the situation, but said she couldn't discuss specifics.

Standard & Poor's gives an A- rating to the city's general obligation bonds, but in late August it placed the bonds on credit watch with potentially negative implications.

The city appears to be out of compliance with the terms of about $6 million in bonds it issued in 2007 in connection with construction of a parking garage at Center and Commercial streets that served patrons of Fitzgerald's Casino and Hotel a block away.

The city owns the land and leased the garage to Fitzgerald's. In 2007, the city sold a $6.1 million bond to DEPFA Bank plc of Dublin, Ireland, and pledged the lease payments from Fitzgerald's to repay the bond.

Fitzgerald's shut its doors in late 2008, and the owner of the casino-hotel property DRW Fitzgerald LLC stopped making lease payments on the parking garage in October 2009.

That was enough to potentially trigger a default.

DEPFA Bank, a specialist in lending to public-sector borrowers, signed off on forbearance agreements with the city earlier this year and hasn't moved to require immediate repayment of the debt.

The most recent forbearance agreement expired on Sept. 16, Standard & Poor's said. It's unknown if a new agreement is in place.

So far, the city has been able to make payments on the bonds because of a fortuitous move in interest rates.

When it structured the deal with the owner of Fitzgerald's, a company led by former Montage developer Fernando Leal, the city assumed that interest rates would be 5.75 percent, and it pegged the lease payments to cover that level of interest.

In fact, interest costs on the variable-rate bonds have been closer to 1 percent. That's allowed the city to accumulate about $478,000 more in lease payments than it's needed to repay the bank. That's enough to allow the city to make payments for about two years at current interest rates, says Standard & Poor's credit analyst Bryan Moore.

In addition, Moore says that the city has a reserve fund of $775,000 on deposit with DEPFA Bank.

Other options available to the city, Moore said, might include a lease to a new tenant or a sale of the land and garage.

Standard & Poor's said it's attempting to get the city's leadership to clarify its intentions.

Olsen said city staff members talk with DEPFA Bank staffers about the issue regularly, and the city seeks to develop a new forbearance agreement.

SIDEBAR

Keep your complaints to yourself

When DEPFA Bank plc signed off on a forbearance agreement in April and agreed that it wouldn't push a City of Reno bond issue for the Fitzgerald's parking garage into default, lawyers for the bank also made darned sure that they wouldn't be hearing any snarky comments from the city.

A provision of the agreement reads:

"For the duration of the forbearance period, the director of finance, the city manager and any other staff member of the city shall not make any remarks in public about the purchaser concerning the bond, the ordinance, the bond purchase agreement or the other financing documents or the identified events of default which could reasonably be considered to be disparaging of the purchaser."