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Global Credit Research - 02 May 2012
NOTE: ON May 3, 2012 the press release was revised as follows: The final sentence of the third paragraph should read: In 2011, the issuance of guaranteed debt increased to 23.7% of that issuance. The percentage figure was incorrect in the original release. Revised release follows:
New York, May 02, 2012 -- It has become increasingly common for New Jersey local governments to
guarantee the debt of other entities, sometimes exposing the municipalities
to additional credit risk, says Moody's Investors Service
in a new report.
"The use of guarantees has proliferated against a backdrop of constricted
credit markets, reduced availability of bond insurance, and
weakened credit fundamentals of many private-sector entities seeking
additional security for their debt," said Moody's AVP-Analyst
Josellyn Yousef, author of the report, "General Obligation
Guarantees by New Jersey Local Governments Can Detract from Their Credit
Quality: An Analysis of the Strength and Structure of Debt Guarantees
New Jersey local governments that pledged their full faith and credit
to guarantee the general obligation debt of enterprises and other municipalities
was 7.9% of all Moody's-rated New Jersey local
government issuance in 2008. In 2011, the issuance of guaranteed
debt increased to 23.7% of that issuance.
"Guaranteed bonds finance many different types of projects such
as water and sewer utilities, solar power systems, and mixed-use
redevelopment projects," said Yousef. "The effect
of the guarantee structure is to substitute the primary obligor's
credit rating with the generally higher rating of the municipality that
serves as guarantor."
The Moody's report outlines how municipalities that guarantee the
general obligation or GO debt of an enterprise or of another municipality
are exposed to additional credit risk through contingent liabilities,
and explains how the rating agency analyzes the associated risks.
"In our view, nonpayment of guaranteed bonds is equivalent
to a default on a municipality's own general obligation bonds,"
said Yousef. "In some cases, a guarantee on debt of
an encumbered enterprise has precipitated material credit deterioration
that led to rating downgrades of the municipalities acting as guarantors."
This was the outcome for the Borough of Collingswood, NJ and City
of Salem, NJ, whose case studies are included in the report.
"We also outline the structure of a typical bond guarantee arrangement,
including key participants and flow of funds, and the factors that
we assess before assigning the guarantor's rating to the debt,"
said Yousef. "These include the strength of the general obligation
pledge, lead time for debt service payments, and size of debt
service reserve funds."
The report is available at http://www.moodys.com/viewresearchdoc.aspx?docid=PBM_PBM141766.
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Public Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
MD - Public Finance
Public Finance Group
Moody's: Increasing use of guarantees by New Jersey munis can add to credit risk
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
No Related Data.
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