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Rating Action:

Moody's assigns A1 to Connecticut GO bonds and affirms GO and related ratings; outlook remains stable

09 Jul 2019

New York, July 09, 2019 -- Moody's Investors Service has assigned an A1 rating to the state of Connecticut's $244.3 million General Obligation Refunding Bonds (2019 Series B). Concurrently, Moody's has affirmed the A1 rating on Connecticut's approximately $17 billion of outstanding general obligation (GO) debt; the A1 rating on approximately $6 billion of special tax obligation senior and second lien bonds; the A1 lease rating on $4.5 billion of bonds secured by state agreements to pay debt service with funds that are deemed appropriated through a special capital reserve fund, contract assistance (except for city of Hartford GO bonds) or other state guarantee mechanisms; and the A1 lease rating on approximately $1.8 billion of General Obligation Bonds issued under the University Of Connecticut, CT (UCONN) 2000 program. Outstanding debt secured by the state's deemed appropriated mechanism has been issued by the Connecticut Housing Finance Authority (CHFA), the Connecticut Higher Education Supplemental Loan Authority (CHESLA), the Connecticut Health and Educational Facilities Authority (CHEFA), Connecticut Innovations, Incorporated, the Connecticut Development Authority, and the Southeastern Connecticut Water Authority.

Moody's has also affirmed the A2 lease ratings on $540 million of the city of Hartford's General Obligation Bonds and on $48 million of the Connecticut Health and Educational Facilities Authority's (CHEFA) state-supported child care revenue bonds. We have also affirmed the short-term VMIG 1 rating on the state's General Obligation Bonds, 2016 Series C bonds. The outlook is stable.

RATINGS RATIONALE

The A1 GO rating reflects Connecticut's high income levels, strengthened governance, and significantly improved liquidity, offset by high liabilities and the resulting high fixed costs for debt service, pension, and post-employment benefits relative to the state's budget. The rating also reflects a lagging economy and recent consecutive years of population loss, which make liabilities more burdensome.

The A1 lease ratings on bonds secured by a special capital reserve fund and similar structures reflect the very strong legal security, which does not require annual appropriation. Most projects financed under these mechanisms are more essential, but the less essential nature of a small number of economic development projects is offset by the strength of the legal security.

The A1 ratings on senior and second lien special tax obligation bonds reflects the strong legal covenants, including a two times additional bonds test and a combined senior and second lien debt service reserve funded at maximum aggregate annual debt service; the diversified stream of pledged revenues with some sensitivity to economic fluctuations; and satisfactory debt service coverage. Both economic and legal factors closely link the credit profile of the special transportation fund to the state general obligation profile.

The A2 lease ratings on state-supported child care bonds reflect the moderate legal structure which requires annual appropriation for debt service, and the high essentiality of the social services provided by the projects. The A2 lease rating on the city of Hartford's GO bonds reflects the very strong legal commitment of the state to pay debt service, which does not require annual appropriation, offset by the possible risk of payment interruption or reduction should Hartford file for bankruptcy.

The VMIG-1 short-term rating on the state's 2016 Series C variable rate demand bonds reflects the credit quality of Bank of America, N.A. (Aa2(cr)/P-1(cr)) as provider of liquidity support in the form of a standby bond purchase agreement (SBPA), the long-term rating of the bonds, and our assessment of the likelihood of an early termination or suspension of the SBPA without a final mandatory tender.

RATING OUTLOOK

Connecticut's outlook is stable, reflecting high level of budgetary reserves and the state's strong provisions to promote fiscal discipline, which pair redressing elements of its high leverage position and requiring GAAP-based budgeting.

FACTORS THAT COULD LEAD TO AN UPGRADE - GO Rating

- Achievement and maintenance of higher GAAP-basis combined available reserve levels

- Established trend of structural budget balance

- Evidence of sustained stronger economic performance

- Reduced pension and debt leverage relative to Moody's 50-state medians, resulting in lower annual fixed costs

FACTORS THAT COULD LEAD TO A DOWNGRADE - GO Rating

- Significant additional leverage, encompassing bonded debt, pension and OPEB obligations and negative unassigned GAAP balances

- Rapid acceleration of revenue/economic/demographic weakness

- Significant decline in liquidity position

FACTORS THAT COULD LEAD TO AN UPGRADE - GO-Related Ratings (including deemed appropriated and annual appropriation credits)

- Upgrade of state GO rating

FACTORS THAT COULD LEAD TO A DOWNGRADE - GO-Related Ratings (including deemed appropriated and annual appropriation credits)

- Downgrade of state's GO rating

FACTORS THAT COULD LEAD TO AN UPGRADE - Special Tax Ratings

- Upgrade of state GO rating

FACTORS THAT COULD LEAD TO A DOWNGRADE - Special Tax Ratings

- Downgrade of state's GO rating

- Weakened legal covenants

LEGAL SECURITY

The state's GO rating represents the credit quality of the state's full faith and credit pledge.

Bonds issued under the UCONN 2000 program or special capital reserve fund, special debt service commitment and state assistance grant agreements are secured by funds that are deemed appropriated and by required debt service payments or debt service reserve replenishment by the state treasurer. The strong legal provisions, in which nonpayment is an event of default, support a rating at the GO level.

The special tax obligation bonds are secured by a pledge of certain revenues that are dedicated to transportation purposes and deposited in a special transportation fund that is constitutionally protected. In the absence of stronger legal separation from state operations, the ratings on both the senior and second liens of the special tax obligation bonds are capped at the state GO rating.

GO bonds issued by the city of Hartford are secured by a state assistance contract agreement where debt service payments are deemed appropriated, but are rated one notch below the state's GO rating due to bankruptcy risk.

The state-supported child care revenue bonds are rated one notch below the GO and are secured by appropriations made by the Connecticut legislature.

The VMIG-1 short term rating on the General Obligation Bonds, 2016 Series C bonds is based on the liquidity facility provided by Bank of America, N.A. (Aa2(cr)/P-1(cr)). The short term rating reflects a structure that ensures timely purchase price payments will be made to investors, the likelihood of termination of the facility without a final tender of the bonds, and the credit quality of the bank providing liquidity support.

USE OF PROCEEDS

The 2019 Series B GO Refunding Bonds will be used to refund all or a portion of certain outstanding state general obligation bonds.

PROFILE

The State of Connecticut has a population of 3.57 million people located in the coastal northeastern US, bordered by Rhode Island (Aa2 stable), Massachusetts (Aa1 stable) and New York (Aa1 stable) with 618 miles of shoreline, according to the National Oceanic and Atmospheric Administration (NOAA). The state has a large and diverse economy with a gross state product of $274 billion in 2018. It is the wealthiest state in the country with per capita income of 139% of the US average.

METHODOLOGY

The principal methodology used in the general obligation ratings was US States and Territories published in April 2018. The principal methodology used in lease ratings was Lease, Appropriation, Moral Obligation and Comparable Debt of US State and Local Governments published in July 2018. The principal methodology used in the special tax ratings was US Public Finance Special Tax Methodology published in July 2017. The principal methodology used in the short-term rating was Variable Rate Instruments Supported by Conditional Liquidity Facilities published in March 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

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.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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.

Marcia Van Wagner
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

Genevieve Nolan
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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