"This is a big boost to issuers such as Philadelphia School District," said Alan Schankel, a managing director at Janney Capital Markets.
Moody's on Monday night upgraded the program to A2 from Baa1, citing a new state law that defines funds needed under aid intercept provisions as appropriated, even if no budget passes. Pennsylvania's fiscal 2016 budget was nine months late, forcing delays in state-aid payments to many districts.
Moody's also raised the maximum rating on school district bonds enhanced under the intercept to A3 from Baa1, while still maintaining a B1 floor, and increased the maximum uplift from an underlying rating to two notches from one notch.
"Additionally, we have reinstituted the 'top-down' treatment for Pennsylvania school district bonds whose structures ensure the intercepts would take place prior to default," said Moody's.
Philadelphia carries an underlying rating of Ba3, but can now borrow using an A2 rating. "The post-default intercept programs still utilize a bottom up approach, but the rating ceiling was raised by Moody's," Schankel said.
Moody's last December downgraded the school district enhancements to a cap of Baa1, citing the payment delays. On Monday it revised its outlook to stable from negative. S&P Global Ratings in December withdrew its intercept-based ratings.
"We would expect S&P to review the new law and revisit their decision," said Schankel.
According to Moody's, the new law eliminates the doubts about the program's swiftness and effectiveness that arose during the 2016 budget impasse. Gov. Tom Wolf signed the fiscal 2017 budget in mid-July.
Pennsylvania's programs, as do those in many states, add layers of bondholder security for local school district bond issuers through intercept programs. They have traditionally allowed many school districts to receive ratings higher than they would get based on their underlying credit metrics.
In 2015, according to Moody's, $10 billion of state aid in 2015 covered the $2.2 billion of annual debt service on $28.6 billion in outstanding Pennsylvania school district debt by 4.5 times, Schankel noted.
PNC Capital Markets managing director Tom Kozlik said that while the new provisions strengthen the Pennsylvania intercept mechanism, they do not guarantee payments of debt service.
"There are limitations," Kozlik wrote in a
Kozlik said the broad goal of states' enhancement of school district debt is to increase the marketability of school district bond issues, on the premise that resulting demand should lower borrowing costs.
"Policies that lower bond costs and save taxpayer money allow states to use scarce financial resources in other productive ways," he said. "For investors, the enhancements offer another layer of security, in addition to the underlying credit quality of the school district, to be considered when deciding among the numerous municipal bond investment options."
