OREANDA-NEWS. S&P Global Ratings lowered its long-term rating on Willacy County Local Government Corp., Texas' series 2011 taxable project revenue bonds to 'CC' from 'CCC+' and removed the rating from CreditWatch, where it was placed with negative implications June 3, 2016. The outlook is negative. In prior reviews, we incorrectly applied our "Special Tax Bonds" criteria, published June 13, 2007, to these bonds, when they should have been analyzed pursuant to our "Human Service Providers" (HSP) criteria, published June 13, 2007, "Principles of Credit Ratings," published Feb. 16, 2011, and "Federal Future Flow Securitization" criteria, published March 12, 2012. We have corrected this error by applying the correct criteria to these bonds in this review.

"The downgrade reflects our view that the current shortfall of pledged revenues on these bonds could lead to a potential default by December 2017," said S&P Global Ratings credit analyst Kate Boatright. We expect a default on these bonds to be a virtual certainty based on a lack of revenues that will be available for payment on these bonds even under the most optimistic performance scenario over an extended period of time.

In analyzing these bonds, we've used portions of our HSP criteria due to the similar nature of cash flows that are based on a contractual relationship with the U. S. federal government (or agency of the federal government) for the provision of services at facilities currently in operation. Key concepts from the HSP criteria that also apply to our analysis of federal prison financings include a review of the service essentiality and need for the services provided by the facility, provider assessment, management quality, and financial analysis. We also analyze the funding agency relationship, including the nature of the contracts with the provider, and the pledged security and legal structure of the bonds. In addition, we have applied our "Principles of Credit Ratings" and our "Federal Flow Securitization" criteria due to the unique credit structure of the revenue bonds, and because federal cash flows support the operation of the facility directly. Under the federal flow securitization criteria, the debt's profile receives an overall score of '2.9' based on our view of the project's very weak project establishment, project funding specification, renewal and reauthorization risk, and weak allotment risk. The score implies that the highest achievable rating is 'BBB-'.

The negative outlook reflects our view that default is a virtual certainty. If the issuer defaults, we would lower our rating on the debt to 'D'. The negative outlook reflects our concern with the facility's available cash balance and future cash flows, given that the issuer now depends on a debt service reserve (and other reserves) to make debt service payments. The outlook also reflects our view that the issuer's ability to meet debt obligations over the following 12 months could be diminished if available funds prove insufficient to make debt service payments and the debt service reserve fund continues to be drawn down. We expect to lower the rating to 'D' during the two-year outlook period absent any favorable conditions that would allow for the securing of sustainable plan to restore operations. We could revise the outlook to stable if project revenues derived from operations are resumed and we believe the likelihood of a payment default changes.