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04 Apr 2018
New York, April 04, 2018 -- Moody's Investors Service has upgraded the city of Hartford's general obligation bonds to A2 from Caa3 based on a contract for financial assistance with the state of Connecticut effectuated March 27, 2018. In conjunction with this action, we have also affirmed the A1 rating on the State of Connecticut's general obligation debt; special tax obligation senior and subordinate lien bonds; bonds secured by state agreements to pay debt service with funds that are deemed appropriated through a special capital reserve fund; the UCONN 2000 program; contract assistance or other state guarantee mechanisms. The rating on state-supported child care revenue bonds requiring appropriation for debt service payments has been affirmed at A2. We have also affirmed the short-term VMIG 1 rating on the state's General Obligation Bonds, 2016 Series C bonds and the MIG 1 rating on its General Obligation Bond Anticipation Notes (2017 Series A). The outlook is stable.
The A2 ratings on the City of Hartford's GO bonds reflects the strong legal provisions governing the state's obligation to make contract assistance payments on the bonds pursuant to a contract for financial assistance, and the essentiality of the state's commitment to its capital city. The obligation to make the payments to Hartford is a full faith and credit obligation of the state, and the state treasurer is required to make payments from the state's general fund to Hartford's paying agent without further need for appropriation. The rating is one notch off the state's GO rating to reflect the possible risk of payment interruption or reduction should Hartford file for bankruptcy.
The state's A1 general obligation ratings reflects Connecticut's high income levels, strong governance, and adequate liquidity, offset by high fixed costs for debt service, pension, and post-employment benefits relative to the state's budget; unfunded pension liabilities and debt outstanding that are among the highest, relative to revenues, of any state in the country; and minimal reserve levels. The rating also reflects a lagging economy that is highly dependent on volatile revenue sources and weak demographic trends. The A1 ratings on bonds secured by a special capital reserve fund and similar structures reflects the very strong legal security, which does not require annual appropriation, and essentiality of projects financed, supporting a rating at the state level. The A1 ratings on senior and subordinate 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 ratings on state-supported child care bonds reflects the requirement for annual appropriation for debt service. 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. (Aa3(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. The MIG 1 rating on the 2017 bond anticipation notes reflects the expectation that Connecticut will have strong market access at BAN maturity (September 14, 2018) given satisfactory long-term credit quality and the state's status as a sophisticated, frequent issuer of bonds. Moreover, in the unlikely event of a market dislocation that impedes timely long term debt issuance, we believe ample liquidity will be available to redeem the BANs.
Connecticut's outlook is stable, reflecting the pending replenishment of the state's rainy day fund 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
- 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
- Significant additional leverage, encompassing bonded debt, pension and OPEB obligations and negative unassigned GAAP balances
- Rapid acceleration of revenue/economic/demographic weakness
- Declining liquidity position
Hartford's outstanding general obligation debt is paid through a state contract for financial assistance effectuated pursuant to Section 376 of Public Act 17-2, which authorized the state to enter into assistance contracts with certain financially distressed municipalities. In the contract, the state assumes the obligation to make contract assistance payments to Hartford's paying agent for debt service on the outstanding general obligation bonds; it would also be obligated to make such payments in case of a refunding or to assume the obligation to pay with respect to any credit facility established to finance, refinance, or purchase the bonds. Connecticut's obligation under the contract to make the payments to the paying agent is a full faith and credit obligation of the state; it is not a state general obligation pledge to Hartford bondholders.
In exchange for entering into the contract, Hartford is required to meet certain financial standards. If it fails to meet them, the state may assume full oversight and control of Hartford's budgeting and contracting in accordance with state law. The city of Hartford can declare bankruptcy only if permitted by the state, an event the contract for financial assistance is designed to avoid and that we think is remote, considering the breadth of state's efforts to assist the city. If Hartford were to file, however, the state's payment obligation would remain in force but treatment of the debt and contract assistance revenues during a bankruptcy case is uncertain.
The state's GO rating represents the credit quality of the state's full faith and credit pledge.
Special capital reserve fund bonds, special debt service commitment and state assistance grants 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 in a fund that is statutorily in perpetuity. In the absence of stronger legal separation from state operations, the ratings on the special tax obligation bonds are capped at the state GO rating.
The state-supported child care revenue bonds are rated one notch below the GO. The payment on these bonds is subject to annual appropriation, and therefore the state could legally default on these bonds if it chose to.
The BANS are payable from proceeds of planned issuance of long-term bonds.
The State of Connecticut has a population of 3.59 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 NOAA. The state has a large and diverse economy with a gross state product of $260 billion in 2016. It is the wealthiest state in the country with per capita income of 141% of the US average.
The principal methodology used in these general obligation ratings was US States Rating Methodology published in April 2013. The principal methodology used in these appropriation-backed and Hartford ratings was Lease, Appropriation, Moral Obligation and Comparable Debt of US State and Local Governments published in July 2016. The principal methodology used in these special tax ratings was US Public Finance Special Tax Methodology published in July 2017. The principal methodology used in the BAN rating was US Bond Anticipation Notes published in April 2014. The additional methodology used in the enhanced 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.
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
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
Moody's Investors Service, Inc.
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No Related Data.
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