After Moody's hits New York over coronavirus, who's next?
Negative outlooks by Moody's Investors Service against New York City and New York State — reeling from the COVID-19 crisis and stretched to their limits — have also put the two in the crosshairs of the capital markets as well.
Similar rating actions against beleaguered states and cities nationwide could follow.
Moody's late Wednesday revised its outlooks on both the state and the city to negative from stable, citing the severe strain from the pandemic. Moody's outlook is also negative on state enhanced ratings and most state intercept programs.
“The combined credit effects of these developments are unprecedented," Moody's said in a statement.
Rating agencies could be targeting other regions as the virus spreads further, according to Howard Cure, director of municipal bond research for Evercore Wealth Management.
"I'm not sure what their strategy is at this time," Cure said of the Moody's action. "Will they go after other places that are obvious, like Nevada and Las Vegas? It's clear that New York is the epicenter, but really the coronavirus is a national crisis. The question is, after New York will they switch to New Orleans, Detroit, Chicago or wherever?"
Moody’s, which upgraded the city to Aa1 in March 2019, affirmed that rating on the city's outstanding GO debt, its Aa2 rating on the outstanding appropriation debt, the enhanced Aa2 rating on the Dormitory Authority of the State of New York Municipal Health Facilities Improvement Program bonds, the Aaa senior and Aa1 subordinate lien Transitional Finance Authority future tax secured bond ratings, and the VMIG 1 ratings assigned to GO and TFA variable rate demand bonds with conditional liquidity support.
The rating agency also affirmed the same Aa1 rating on the state's GO, personal income tax revenue, sales tax revenue, New York Local Government Assistance Corp. and New York City Sales Tax Asset Receivable Corp. bonds. Moody's also affirmed the Aa2 ratings on other appropriation-backed debt including the Mental Health Services Facilities and the Transitional Finance Authority's building aid revenue bonds.
Conduit issuers account for much of the state's debt.
The outlook on the city applies to $38 billion of general obligation debt; $4.5 billion of outstanding appropriation-backed debt issued though the Hudson Yards Infrastructure Corp.; Health + Hospitals; Educational Construction Fund; the New York City Industrial Development Authority and the Dormitory Authority of the State of New York; and $39 billion of outstanding future tax-secured revenue bonds issued by the Transitional Finance Authority.
"The rapid and widening spread of the outbreak, deteriorating global economic outlook, falling oil prices, and financial market declines are creating a severe and extensive credit shock across many sectors, regions and markets,” Moody’s said.
Moody’s regards the coronavirus outbreak as a social risk under its environmental, social and governance framework, given the substantial implications for public health and safety.
According to data on the Municipal Securities Rulemaking Board's EMMA website, a block of city fiscal 2020 Series D, Subseries D-1 tax-exempt bonds maturing in 2045 that originally priced at 105.729 cents on the dollar and a 2.35% yield sold to a customer Wednesday at a price of 98.001 cents and a 3.116% yield.
A block of state Series 2013A sales tax revenue bonds maturing in 2033 that originally priced at 97.324 cents on the dollar and a 4.125% coupon sold to a customer at a price of 104.7 cents and a 2.493% yield.
New York City on Wednesday reported 47,439 positive cases for the virus and 1,374 related deaths, including 278 within 24 hours. Statewide, the count is 83,712 positive cases and 1,941 deaths.
At a news briefing, Mayor Bill de Blasio referenced Sunday as “that kind of demarcation line, that D-Day,” after which the number of virus patients would soar even further.
Citing a dire need for medical equipment, De Blasio said that by Sunday, the city will need 3.3 million N95 masks, 2.1 million surgical masks and 100,000 isolation gowns.
"These are big numbers, for sure, but they are reachable numbers, but we have to make sure it happens in time."
The crisis is pummeling state and city finances on several fronts, from lost tax revenue due to business closings to additional healthcare expenditures.
State lawmakers in Albany have been working past Wednesday's deadline to finalize a fiscal 2021 spending plan. While Gov. Andrew Cuomo originally proposed a $178 billion plan in January, budget officials have said the finalized budget might have $10 billion less in state funding to account for expected losses in tax revenues due to the pandemic.
The city deadline for FY21 is June 30.
De Blasio’s $95.3 billion preliminary budget is before the City Council. He has said he intends to be on time with his executive budget release, scheduled for later this month.
The mayor and city budget director Melanie Hartzog are requiring agency heads to cut spending under a program to eliminate the gap, or PEG. While the initial goal is $1.3 billion, that number will rise, he said Thursday.
"It's still not clear how large or how long the steep revenue declines associated with the current economic disruption will be, nor do we know how New York City and other local governments will address them," said Maria Doulis, vice president of the watchdog Citizens Budget Commission. "However, as Moody notes, New York City needs greater expense reductions than what's been announced to date to meet the revenue decline.
"The spending cuts should be larger and should be focused on improving efficiency and cost-effectiveness of government operations."
Healthy liquidity entering the coronavirus crisis will help the city bridge the gap between extraordinary public health spending and expected federal reimbursements, according to Moody’s.
“We expect city revenue to return closer to normal patterns when social distancing ends and the economy starts to normalize,” Moody’s said.
The city’s five pension funds are also vulnerable. The watchdog Independent Budget Office has said that if the stock market decline cuts the overall value of its five pension funds 20%, matching the loss in the 2008 recession loss, it could cost New York about $412 million annually in added pension spending over 15 years.