NOTE: On October 11, 2016 the press release was corrected as follows: In the methodology section the date of the methodology publication was corrected to July 2016. Revised release follows.
New York, October 07, 2016 -- Issue: Pension Obligation Bonds, Series 2016; Rating: Aa3; Rating Type: Underlying LT; Sale Amount: $3,329,155,000; Expected Sale Date: 10/26/2016; Rating Description: Lease Rental: Appropriation;
Summary Rating Rationale
Moody's Investors Service has assigned a Aa3 rating to the Alaska Pension Obligation Bond Corp.'s $3.33 billion Series 2016 Pension Obligation Bonds (Taxable). The par amount of the bonds, which are expected to price on Oct. 26, are expected to be between $2.35 billion and $3.33 billion, depending on market conditions.
The Aa3 rating is one notch lower than the State of Alaska's Aa2 general obligation rating. The one-notch distinction from the GO rating incorporates the risk of non-appropriation, as payment of debt service on the bonds is subject to appropriation annually by the state legislature.
The state's Aa2 rating recognizes its extremely large available reserves, which buy it several more years to figure out what its fiscal future will look like. The state is running deficits of more than $3 billion per year, an unsustainable trend that, under our baseline assumption, the state will correct before coming close to depleting its reserves.
The negative outlook incorporates the uncertainty about Alaska's inability so far to achieve a more sustainable fiscal identity through political solutions. As the state spends down its reserves - which are still enormous - the risks to the state's long-term credit profile will intensify.
Factors that Could Lead to an Upgrade (Removal of Negative Outlook)
Achievement of a sustainable solution to the state's structural imbalance
Economic recovery leading to more predictable fiscal operations
Factors that Could Lead to a Downgrade
Prolonged delays in achieving a budget solution, leading to significant further draws on available reserves
Continued growth in long-term liabilities
The Alaska Pension Obligation Bond Corp.'s (POBC) bonds are payable by the State of Alaska, subject to appropriation by the legislature.
The security for these bonds is established under an indenture between the POBC and the trustee, and a funding agreement between POBC and the state. Under the funding agreement, the state agrees to make "Funding Payments" into a trust estate created under the indenture. The Funding Payments will be sufficient to pay debt service, but they are payable only once appropriated by the legislature. Should the legislature choose not to appropriate Funding Payments, no funds would be pledged to bondholders.
In the event of a non-appropriation, the Department of Administration agrees to seek a loan from the Department of Revenue to cover a deficiency. Also, the chair of the POBC agrees to request the governor to convene a special legislative session to approve supplemental appropriations to cover debt service. However, these remedies would still require appropriations from the legislature. There is therefore no recourse to bondholders should the legislature decide it doesn't want to pay debt service on these bonds.
Use of Proceeds
Proceeds of the bonds will be deposited into the state's pension plans. The state's intention is to eliminate the need to make pension amortization payments in excess of the percentage-of-payroll contributions it currently makes according to state law.
The obligor for these bonds is the State of Alaska, whose pledge to pay debt service on these bonds is subject to appropriation by the legislature. Alaska is the largest state based on land mass, but its population ranks 48th among the states, at 738,000. Its GDP ranks 43rd
The principal methodology used in this rating was Lease, Appropriation, Moral Obligation and Comparable Debt of US State and Local Governments published in July 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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.
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