Rating Action: Moody's assigns an A2 to GBG, LLC's taxable revenue bonds, Series 2020; outlook stable
Global Credit Research - 04 Aug 2020
New York, August 04, 2020 -- Moody's Investors Service has assigned an A2 rating to GBG, LLC's $60.6 million Taxable Revenue Bonds (Sandia Labs Administration Building) Series 2020. Bond proceeds will refinance debt for an administrative building at the US Department of Energy's (DOE) Sandia National Laboratory (SNL) in Albuquerque, New Mexico. The outlook is stable.
The A2 rating on the Series 2020 bonds reflects: (i) the credit strength of the United States of America's (Government of, Aaa stable) Department of Energy acting through its contractor, the National Technology & Engineering Solutions of Sandia, LLC (NTESS), as lessee under the lease agreement supporting the bonds; (ii) the high essentiality of the financed project, an administrative building at the Sandia National Laboratory in Albuquerque, New Mexico; and (iii) a complex legal structure involving a management and operations (M&O) agreement and recurring renewal risks on both the M&O and lease agreements. Risks in the structure are balanced by the DOE maintaining considerable control and rights related to the lease as well as the payment of debt service via a third-party special account to which the DOE maintains title. In the event the lease is not renewed, however, we expect recovery for bondholders from the residual building value will be limited due to the smaller regional market.
We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. The coronavirus crisis is not a key driver for this rating action. We do not see any material immediate credit risks for GBG LLC. However, the situation surrounding coronavirus is rapidly evolving and the longer term impact will depend on both the severity and duration of the crisis. If our view of the credit quality of GBG LLC changes, we will update the rating and/or outlook at that time.
The stable outlook reflects the rating outlook of the United States of America and our expectation that the contractor and DOE will continue to renew the lease on an annual basis.
FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATING
-Substantial reduction or removal of the renewal, termination and appropriation risks
-Renewal of the lease with the contractor and Department of Energy that enables all bond payments to be serviced with revenue from leases currently in force
FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATING
-Downgrade of the United States of America (Government of, Aaa stable) issuer rating
-Interruption or delay in monthly lease payments
-Non-renewal of the lease
The Series 2020 bonds are being issued to refund prior debt that was used to finance the construction of the Innovation Parkway Office Center (IPOC) at the Sandia Science and Technology Park in Albuquerque, New Mexico. The IPOC facility serves as the primary administrative center for the Sandia National Laboratory (SNL) and sits just outside the entrance to the Kirtland Airforce base, which houses the technical facilities of SNL.
The bonds are a general obligation of the issuer, GBG LLC, and are secured by a mortgage on the property, including certain personal property, a lien on GBG's leasehold interest under the ground lease and all revenue under the lease.
In practice, the debt will be serviced by lease payments made under a lease between GBG as lessor and NTESS, the lessee and a subsidiary of Honeywell International Inc. (A2 stable). Under a management and operations (M&O) agreement with the DOE, NTESS serves as the contractor and operator of the SNL for a five-year term. The DOE deposits contractual payments for the NTESS into a special financial institution account. Funds in this account can only be withdrawn pursuant to the terms of the agreement and cannot be commingled with other NTESS or Honeywell funds. The DOE maintains title to any funds in the account. Funds for debt service are assigned and directly paid to the bond trustee.
Although, NTESS and not the DOE is the lessee under the lease, the government has ensured that the lease and all other obligations will remain in place regardless of who serves as the government contractor. Should the DOE replace NTESS with another contractor it will require the successor to assume all obligations of the predecessor.
The transaction is exposed to significant renewal risk. The current lease agreement consists of 20 one-year lease terms and expires in 2027, well before final maturity of the debt. Bondholders will likely be exposed to considerable losses in 2027 if the agreement is not renewed or extended. Additionally, owing to federal requirements under the Freedom of Information Act (FOIA) the lease must be renewed on an annual basis through a purchase order. The terms of renewal, including annual rent, are outlined in the original lease agreement. Annual renewal is highly likely - it has occurred every year since 2007 - although bondholders remain exposed to appropriation and annual renewal risk. NTESS also has the right to terminate the lease for convenience, although it will have to pay fees under certain circumstances and has covenanted to the trustee and lessor that it will renew the lease every year.
Nonetheless, the project is considered highly essential. SNL has been in operation for decades and continues to expand. As a cornerstone of the government's nuclear apparatus, the laboratory remains crucial for national security. The IPOC building is an important component of this facility. Given the administrative purpose of the building, some of its functions could be moved elsewhere; however, some functions, such as site badging must remain in the vicinity of the base. Furthermore, the government has been increasing its use of the space and may need additional administrative facilities in the near future.
Accordingly, the likelihood of re-signing the lease - both annually and in 2027 - is high. However, should the contractor or the DOE decide not to re-let the property, and the property was subsequently sold or released, bondholders may experience less than a full recovery, given the relatively small regional market and possible period of vacancy while a new tenant is found.
Despite the complexities of the transaction, the legal structure is moderately strong, with the complexities offset by substantial DOE rights and control of the lease and funds, as well as payment of debt service to trustee that insulates cash flows from exposure to both the lessor and lessee. Bondholders have essentially no risk of construction, abatement, set-off or bankruptcy. Termination and appropriation risk do exist; although these are closely tied to the renewal risk.
USE OF PROCEEDS
Bond proceeds will be used to refinance certain outstanding debt, fund a distribution of capital to the lessor's parent company, fund required reserves, including a major maintenance reserve and an operating and maintenance reserve, and pay the costs of issuance.
The United States has the world's largest economy and is the center of global trade and finance, with a gross domestic product of $21.4 trillion in 2019. Its population of 328 million is third-largest. The Department of Energy (DOE) is responsible for the United States' energy, environmental and nuclear policies.
Sandia National Laboratories (SNL) functions as a nuclear weapons research, development and engineering facility and helps further the mission of the National Nuclear Security Administration (NNSA), a semi-autonomous element within the DOE. SNL is operated by National Technology & Engineering Solutions of Sandia LLC (NTESS), a wholly-owned subsidiary of Honeywell International, Inc. NTESS serves as the lessee under the lease.
GBG LLC is a single purpose company and serves as the issuer and lessor for the project. It is an affiliate of DePonte Investments, Inc, which focuses on commercial real estate development, leasing and management, particularly for government properties.
The principal methodology used in this rating was Lease, Appropriation, Moral Obligation and Comparable Debt of US State and Local Governments published in July 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1102364. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
The rating has been disclosed to the rated entity or its designated agent (s) and issued with no amendment resulting from that disclosure.
This rating is solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.
Joshua Grundleger Lead Analyst State Ratings Moody's Investors Service, Inc. 7 World Trade Center 250 Greenwich Street New York 10007 US JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Timothy Blake MANAGING DIRECTOR Municipal Supported Products JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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