Alaska GO rating lowered to AA-minus by S&P Global Ratings

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Alaska had its rating lowered to AA-minus from AA by S&P Global Ratings, which retained a negative outlook.

On Friday, S&P also lowered the ratings linked to the state's general obligation bonds by one notch to A-plus on its lease appropriation-backed debt, A-plus on the Alaska Municipal Bond Bank’s debt secured through continuing appropriations and a moral obligation pledge of the state and to A on bonds issued through the Alaska Energy Authority and backed by a moral obligation pledge of the state.

"The rating action is based on our view of a structural gap now identified for fiscal 2020 of nearly 25% and an adopted structural gap of about 21% for fiscal 2021 resulting from a collapse in oil prices," said S&P Global Ratings credit analyst Timothy Little.

The drop in prices is largely due to a demand shock as a result of efforts to mitigate health and safety risks posed by the COIVD-19 pandemic and an oversupply of oil in the market.

"Our negative outlook on the state reflects narrowing fiscal options beyond fiscal 2021 as the enacted budget virtually depletes the state's traditional reserve balance, its Constitutional Budget Reserve Fund, by the end of the fiscal year," Little said.

If actual results end up at worse than levels in that budget, the state will be left with limited options to return to structural balance other than significant reform of its fiscal profile or further drawing on its earnings reserve account for operations.

There is a one-in-three chance S&P could take additional downward rating actions on the state over the next two years if structural alignment of its budget does not occur, according to the rating agency.

The state has narrowing time and tools available to adjust its budgetary performance and if revenue estimates prove worse than expected, analysts wrote, credit deterioration could occur more rapidly.

The current oil price collapse occurs during a significant global supply and demand shock on top of a global recession.

"A prolonged period of oil markets in their current state is likely to create lingering recessionary effects even if the rest of the country were to begin its recovery," S&P analysts wrote. "However, if the state were to return to near structural balance with a plan to build its traditional reserves, we may revise the outlook back to stable."

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