NOTE: On April 01, 2021, the press release was corrected as follows: The second sentence of the press release was revised to “ Moody's upgraded to Aa3 from A1 the lease rating on approximately $670 million 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 lease rating on approximately $1.7 billion of General Obligation Bonds outstanding under the University Of Connecticut, CT (UCONN) . Revised release follows.
New York, March 31, 2021 -- Moody's Investors Service has upgraded to Aa3 from A1 the State of Connecticut's approximately $16 billion of outstanding general obligation (GO) debt. Moody's upgraded to Aa3 from A1 the lease rating on approximately $670 million 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 lease rating on approximately $1.7 billion of General Obligation Bonds outstanding under the University Of Connecticut, CT (UCONN) . Moody's also upgraded to Aa3 from A1 approximately $6 billion of special tax obligation bonds outstanding for transportation purposes. The Aa3 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 upgraded to A1 from A2 the lease ratings on approximately $490 million of the City of Hartford's general obligation bonds and on $44 million of the Connecticut Health and Educational Facilities Authority's (CHEFA) state-supported child care revenue bonds. Moody's also affirmed the short-term VMIG 1 rating on the state's General Obligation Bonds (2016 Series C)(Variable Rate Demand Bonds).
Concurrently, Moody's assigned Aa3 ratings to $95.9 million of Connecticut Health and Education Facilities Authority (CHEFA) Revenue Refunding Bonds, Connecticut State University System Issue Series R, consisting of $14.79 million of Series R-1 and $81.09 million of Series R-2 Bonds (Federally Taxable). The bonds are scheduled to sell on April 8.
Moody's also assigned Aa3 ratings to $54.325 million of Connecticut Housing Finance Authority (CHFA) State-Supported Special Obligation Bonds, consisting of $7.51 million Series 27, $16.47 million Series 28, $29.3 million Series 29 (Federally Taxable) and $1.045 million Series 30 (Federally Taxable). The bonds are scheduled to sell on April 6. The outlook is stable.
RATINGS RATIONALE
The upgrade of Connecticut's GO rating to Aa3 reflects the state's continued commitment to numerous governance improvements that have already borne fruit in the accumulation of significant budgetary reserves and good financial performance through the pandemic. The reserves are critical in mitigating budgetary inflexibility created by the state's heavy debt and retiree benefit liabilities, which are among the highest of the states. The policies creating the reserves also reduce the impacts of revenue volatility, promote more robust funding of the state's pension systems and lead to better budget management. The Aa3 rating also reflects Connecticut's high income and wealth levels offset by a lagging economy and recent consecutive years of population loss, which make liabilities more burdensome.
The Aa3 lease ratings on bonds secured by a special capital reserve fund and similar structures, including the new CHFA and CHEFA sales, 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 Aa3 rating on senior lien special tax obligation bonds reflects the strong legal covenants, including a two times additional bonds test and a 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 A1 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 A1 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 degree of separation between the state and holders of the bonds. We consider the state's purpose in contracting to pay debt service on these bonds a reflection of the high essentiality to the state of supporting the finances of the state's capital city.
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. (LT/ST Counterparty Risk Assessment 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 include bolstering funding of its pension system, improving liquidity and requiring GAAP-based budgeting.
FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS
For the GO bonds:
- Reduced pension and debt leverage relative to the state's economic base, resulting in lower fixed costs
- Evidence of sustained stronger economic performance
For the GO-related bonds (including deemed appropriated and annual appropriation credits):
- Upgrade of state GO rating
For the special tax rating:
- Upgrade of the state's GO rating
FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS
For the GO bonds:
- 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
- Downgrade of counterparty rating (short-term rating only)
For the GO-related bonds (including deemed appropriated and annual appropriation credits):
- Downgrade of the state's GO rating
For the special tax bonds:
- Downgrade of the 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 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 rating of the special tax obligation bonds is 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 because of the separation between the state and the holders of the bonds.
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 state's 2016 Series C variable rate demand bonds is based on the standby bond purchase agreement liquidity facility provided by Bank of America, N.A. (LT/ST Counterparty Risk Assessment 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 proceeds of the Connecticut Health and Educational Facilities Authority Series R bonds will refund certain outstanding bonds previously issued by CHEFA to benefit Connecticut State University.
The proceeds of the Connecticut Housing Finance Authority Series 27-30 bonds will be used to finance mortgages for facilities for persons with special needs and to refund certain outstanding bonds previously issued for the same purposes by CHFA.
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 (Aa2 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 $286 billion in 2019. It is the wealthiest state in the country with per capita income of nearly 140% of the US average.
METHODOLOGY
The principal methodology used in 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 enhanced rating was Variable Rate Instruments Supported by Conditional Liquidity Facilities published in March 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1057134. The principal methodology used in the annual appropriation obligation ratings was Lease, Appropriation, Moral Obligation and Comparable Debt of US State and Local Governments published in January 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1260202. The principal methodology used in the special tax ratings was US Public Finance Special Tax Methodology published in January 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1260087. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.
REGULATORY DISCLOSURES
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.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website 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_1243406.
At least one ESG consideration was material to the credit rating action(s) announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.
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Marcia Van Wagner
Lead Analyst
State Ratings
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Timothy Blake
Additional Contact
Municipal Supported Products
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