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Rating Action:

Moody's affirms New Jersey's A3 GO rating and assigns A3 ratings to COVID-19 General Obligation Emergency Bonds; outlook negative

05 Nov 2020

New York, November 05, 2020 -- Moody's Investors Service has assigned A3 ratings to the State of New Jersey's $1.9 billion COVID-19 General Obligation Emergency Bonds, 2020 Series A and $2.3 billion COVID-19 General Obligation Emergency Bonds, 2020 Series B (Federally Taxable). The outlook on the bonds is negative. The bonds are expected to price the week of November 16.

Moody's affirmed the A3 rating on New Jersey's outstanding general obligation debt. The outlook is negative. In addition, Moody's has affirmed the state's A3 rated bonds issued by the Garden State Preservation Trust, NJ; the Baa1 and Baa2 rated appropriation backed debt; Baa1 rated moral obligation debt issued by the South Jersey Port Corporation; and Baa1 rated New Jersey Municipal Qualified Bond Program, New Jersey Qualified School Bond Program and New Jersey County College Enhancement Bond Program Chapter 12 intercept programs. The outlook is negative on all bonds. The affirmations affect approximately $32.3 billion of outstanding rated debt.

Moody's has also downgraded the ratings on New Jersey's $829 million of outstanding Motor Vehicle Surcharge bonds to Baa2 (Sr lien) from Baa1 and Baa3 from Baa2 (Sub lien). The bonds are issued by the New Jersey Economic Development Authority (NJ EDA). The outlook on the bonds is negative.

Please click on this link http://www.moodys.com/viewresearchdoc.aspx?docid=PBM_PBM906840354 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and identifies each affected issuer.

RATINGS RATIONALE

New Jersey's A3 general obligation rating reflects the state's large, diverse and wealthy economy offset by large, growing long-term liabilities and the multi-year burden of rapidly-rising pension contributions, which are the result of significant historic pension underfunding. The state's economy is recovering from unprecedented disruption caused by the coronavirus pandemic, with downside risk that another wave of cases and business closures will delay the recovery and increase budget pressures. In addition, New Jersey's high leverage and long-standing structural imbalance will worsen due to the sizeable coronavirus-driven budget gap that the state plans to balance with deficit financing bonds, adding to already-large fixed costs. Although revenue recovery will be somewhat faster than other states, large budget gaps will remain until fiscal 2023, straining the state's ability to structurally balance its budget and increasing the risk of cuts to future pension contributions. The state's financial flexibility is enhanced by the governor's broad powers to reduce expenditures mid-year, which is an important, proven budget tool.

The continuing impact of the coronavirus outbreak and protracted economic recovery is creating a severe and extensive credit shock across many sectors, regions and markets, and the combined credit effects of these developments are unprecedented. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.

The A3 rating on the Garden State Preservation Trust bonds is based on the state's contractual obligation to transfer a constitutionally-dedicated portion of the state-wide sales tax (the first $98 million) to the trust for debt service, subject to annual appropriation. The GO-level rating is supported by the strong legal structure restricting the use of the allocation to debt service and ample coverage provided by the dedicated state-wide revenue source. However, the rating is capped at the state's GO due to the lack of structural and mechanical separation of the dedicated revenue stream from the state's General Fund and the technical requirement for annual appropriation.

The Baa1 ratings on the majority of the state's appropriation debt and the County College Enhancement Program Chapter 12 are notched off the State of New Jersey's A3 GO rating, reflecting the strong legal structure, the essential nature of the financed projects and the need for annual legislative appropriation of revenues to pay debt service. A large majority of the state's net tax-supported debt is subject to appropriation, and the importance of maintaining access to the capital markets provides strong incentive for the state to make these appropriations on essential assets.

The Baa2 rating on the state's appropriation debt issued through the New Jersey Sports & Exposition Authority reflects appropriation risk and the lower essentiality of the racetrack, convention center and stadium projects that were financed with bond proceeds.

The Baa1 ratings on the South Jersey Port Corporation senior lien and subordinate lien bonds are notched off the State of New Jersey's A3 GO rating and reflect the state's commitment, as established in the corporation's enabling act and bond resolutions, to consider appropriating funds to replenish the port's debt service reserve fund (DSRF) to match maximum annual debt service. The state has a strong, demonstrated commitment to making these appropriations, given its 34-year history of replenishing the corporation's reserve fund; the state's history of including broad appropriation language in the budget, which is historically adopted well in advance of the corporation's December 1 request date, and the state's non-impairment pledge. The state's replenishment commitment is equivalent for both liens, and state appropriations deposited into the subordinate lien DSRF cannot be transferred to the senior lien DSRF. Nothing requires the legislature to appropriate proportionately to the two liens' DSRFs. However, the risk of inequivalent appropriations does not warrant a full notch rating distinction.

The Baa1 programmatic ratings on the Qualified School Bond Program and the Municipal Qualified Bond Program are notched off the State of New Jersey's A3 GO rating. The one notch distinction reflects the programs' strong position in the state's hierarchy of debt and spending priorities and strong program mechanics, including the direct payment of aid to the debt service trustee.

The downgrade of the NJ EDA Motor Vehicle Surcharge bonds to Baa2 (Sr) and Baa3 (Sub) reflects the recent accelerated decline in pledged revenues and debt service coverage, driven by coronavirus related closures of department of motor vehicle (DMV) locations and courthouses. We regard the coronavirus outbreak, a key driver in this rating action, as a social risk under our ESG framework, given the substantial implications for public health and safety. The Baa2 (Sr) and Baa3 (Sub) ratings also reflect i) the need for legislative appropriation of pledged revenues and ii) relatively weak pledged revenue fundamentals including a very narrow revenue base and steadily declining revenue trend that is somewhat balanced by the statewide tax base and the closed lien. The weaker subordinate lien coverage is somewhat balanced by the turbo feature on the last five maturities that will likely decrease future debt service and reduce revenue risk, as well as an Advance Account that provides liquidity against a timing mismatch between revenue collection and debt service payments.

RATING OUTLOOK

The negative outlook reflects the expectation that the state will have difficulty restoring budget balance over the next two fiscal years given the size of the structural budget gap, the lack of meaningful budget reserves, increased, high fixed cost levels and rapidly growing pension contributions. Resolution of the negative outlook will depend on the depth and duration of the coronavirus-related economic disruption and on the state's budget balancing actions, and consider any resulting decline in reserves, increased debt and pension levels, and/or growth in the structural budget gap.

The outlook on all GO-related and notched debt listed above is negative, reflecting the outlook on the state GO.

The negative outlook on the NJ EDA Motor Vehicle Surcharge bonds reflects the outlook on the state and weak fundamental pledged revenue trends.

FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS

For the GO rating:

- Implementation of structurally balanced actions to close budget gaps

- Continuation of planned pension contributions, in line with the current 1/10 plan

- Maintenance of budgetary balances and liquidity

- Relatively stable debt and pension metrics, and fixed cost increases that remain affordable

For all GO-related and notched debt:

- An upgrade of the GO rating

For the NJ EDA Motor Vehicle Surcharge Bonds:

- A sustained increase in pledged revenue collections that bolsters debt service coverage, and/or substantially shortens final maturity

FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS

For the GO rating:

- Lower-than-planned pension contributions that do not maintain the 1/10 schedule

- Issuance of additional deficit financing bonds

- Failure to address large structural imbalance with recurring actions

- Significantly reduced liquidity levels and/or increased liquidity support (cash-flow borrowing and other cash management tactics)

- A significant increase in unfunded pension liabilities or other debt that elevates fixed costs

For all GO-related and notched debt:

- An upgrade of the GO rating

For the South Jersey Port Corporation bonds:

- Indications that the state's incentive to make annual appropriations has diminished

For the NJ EDA Motor Vehicle Surcharge Bonds:

- Either a downgrade of the state or accelerated declines in pledged revenues, beyond current baseline projections, that deteriorate coverage

LEGAL SECURITY

New Jersey's G.O. bonds are general obligations of the state, secured by the full faith and credit of the state.

The Garden State Preservation Trust bonds are secured by the state's contractual obligation to transfer a constitutionally-dedicated portion of the state-wide sales tax (the first $98 million) to the trust for debt service, subject to annual appropriation.

The state's various appropriation-backed bonds, including the Chapter 12 intercept bonds, are payable solely from anticipated state payments made pursuant to a contract, lease or funding agreement, subject to annual legislative appropriation. Once the legislature has appropriated the funds, the state's payment obligations are absolute and unconditional.

The South Jersey Port Corp senior and subordinate lien bonds are secured first by a senior and subordinate lien, respectively, on net revenues of the port corporation's operations. All senior and subordinate bonds are additionally secured by - and primarily paid from - the state's commitment to annually appropriate amounts sufficient to restore the debt service reserve fund (DSRF) to the required level.

The Qualified School Bond Program and the Municipal Qualified Bond Program intercept programs provide credit enhancement to participating schools and municipalities through the diversion of state aid revenues directly to a trustee to ensure timely debt service payments, and thereby prevent debt service obligations from competing with other local expenditure priorities.

The senior and subordinate lien NJ EDA motor vehicle surcharge bonds are secured by motor vehicle surcharges and unsafe driver surcharges, subject to legislative appropriation. After appropriation, the pledged revenues will be transferred monthly to the EDA by the state Treasurer pursuant to state statute and a contract between the two parties.

PROFILE

New Jersey is the 11th-largest state by population in the United States. Its gross domestic product per capita ranks 8th among the states (in current dollars).

METHODOLOGY

The principal methodology used in the general obligation ratings was US States and Territories published in April 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1084466. The principal methodology used in the special tax ratings was US Public Finance Special Tax Methodology published in July 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1077147. The principal methodology used in the appropriation, moral obligation bonds and NJ County College Enhancement Program Chapter 12 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. The principal methodology used in the intercept programs was State Aid Intercept Programs and Financings published in December 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1067422. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

The List of Affected Credit Ratings announced here are all solicited credit ratings. Additionally, the List of Affected Credit Ratings includes additional disclosures that vary with regard to some of the ratings. Please click on this link http://www.moodys.com/viewresearchdoc.aspx?docid=PBM_PBM906840354 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and provides, for each of the credit ratings covered, Moody's disclosures on the following items:

- Rating Solicitation

- Issuer Participation

- Participation: Access to Management

- Participation: Access to Internal Documents

- Disclosure to Rated Entity

- Endorsement

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.

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.

At least one ESG consideration was material to the credit rating outcome announced and described above.

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.

Baye Larsen
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

Marcia Van Wagner
Additional Contact
State Ratings
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

No Related Data.
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