Moody's Investors Service is looking at the impact of a federal investigation into loan guarantees made by the Town of Oyster Bay in light of the indictment of restaurateur Harendra Singh, the credit rating agency reported Monday.
The town's failure to publicly disclose its potential obligation to repay loans if Singh defaults on them could have a material impact on its credit, Moody's said in its report.
Singh sought the loans ostensibly to improve town facilities he manages. A federal indictment last week alleged he bribed an unnamed town official so the town would provide "indirect guarantees" on the debt.
If required to pay the loan amount -- Moody's cited $14.3 million while prosecutors pegged it at $20 million -- the town would only slightly increase its $800 million in debt, said the report issued Monday. However, it added, "Failure to disclose this debt does call into question management's oversight of operations.
"The credit impact to the town of the arrest is not clear at this time, and Moody's will continue to monitor the situation," Moody's said.
The agency noted that the town's position is that the loan guarantees are unenforceable because they were unauthorized and violated state law.
Town officials did not respond to requests for comment Monday night.
A credit downgrade would increase the town's borrowing costs. Moody's also said it expects an investigation into the town's culpability will not be resolved quickly and the town would likely borrow to pay penalties if a successful case were brought against it.
Federal prosecutors last week charged Singh with 13 criminal counts that included allegedly bribing a town official in order to obtain loan guarantees, failing to report millions of dollars of wages to the Internal Revenue Service, lying to federal investigators and fraudulently collecting almost $1 million from the Federal Emergency Management Agency after superstorm Sandy.
It is unclear if the loan guarantees are "binding contracts" or violate the state's prohibition against municipalities guaranteeing debt on behalf of private companies, the report said.
Last week, the state's comptroller's office and attorney general's office declined to comment on whether the guarantees violated state law.
Moody's report also raised the possibility that the federal government could sanction Oyster Bay.
"The town could face federal penalties by the Securities Exchange Commission for failing to disclose the debt guarantee," the report said.
In an interview last month, Matt Fabian, a partner and bond analyst at Municipal Market Analytics, Inc., said a failure to disclose the potential liabilities could expose the town and town officials to litigation from investors and regulators.
"There have been a number of SEC suits recently in part to set an example that they are no longer tolerating inadequate disclosure and they're aggressively pursuing fraud," Fabian said then.
Oyster Bay's credit rating has deteriorated sharply in recent years, with agencies citing years of imbalanced budgets and weak financial management.
Last summer, Standard & Poor's downgraded the town's debt to BBB from A-minus, two notches above junk bond status while Moody's downgraded it to A3 from A2.