Bond insurers say they are open to a Hartford debt restructuring
Insurers of a majority of Hartford, Conn.'s general obligation bonds told officials in Connecticut's capital that they are willing to discuss bond restructuring as an alternative to bankruptcy.
Assured Guaranty Municipal Corp. and Build America Mutual met recently with Mayor Luke Bronin, members of Gov. Dannel Malloy’s staff and other state and local representatives.
“We expressed our willingness to work constructively with the city and other stakeholders to develop a consensual resolution that would provide debt service relief for the city while it also moves forward with other structural reforms,” Assured said in a statement Monday in advance of the city’s conference call with bondholders.
“We believe a consensual agreement among stakeholders offers the city a better path forward than bankruptcy, which would have long-term negative implications for the state of Connecticut, Hartford and other Connecticut municipalities,” the statement said.
Two weeks ago, Bronin said Hartford, whose bonds are rated deep into junk, could file for bankruptcy within 60 days. Over the summer he hired law firm Greenberg Traurig LLP to weigh restructuring options.
Assured Guaranty and Build America Mutual Insurance, combined, wrap roughly 80% of the city's outstanding bonds, according to Municipal Market Analytics. Hartford, in its most recent comprehensive annual financial report, for the year ending June 30, 2016, reported $683 million of general obligation debt.
“Hartford’s fiscal challenges can most successfully be addressed through a consensual process that engages all interested stakeholders and avoids a costly bankruptcy filing by the city,” BAM’s chief credit officer, Suzanne Finnegan, said in a statement.
“Utilizing BAM’s guaranty as part of a debt-restructuring solution will drive substantial savings compared with the costs Hartford would face if it attempted to access the market on its own as a below investment grade issuer and advance the mayor’s goal of setting Hartford’s budget on a path towards long-term sustainability,” Finnegan added.
Speaking to bondholders on the conference call, Bronin said he appreciated the bond insurers' outreach. “The city’s fiscal crisis cannot be solved at the local level alone,” he said. Bronin and Greenberg Traurig took no questions from bondholders.
Debt-service payments of $3.8 million and $26.9 million are due this month and late October, respectively.
According to BAM’s Finnegan, the state should draw on its “long track record” of working with its distressed municipalities and investors. She cited Waterbury, West Haven and Bridgeport. The latter filed under Chapter 9 in 1991, but a federal judge ruled the city could pay its bills.
Assured said it has discussed ways to help ease some of Hartford’s financial problems, citing new state legislation that could reduce and level the city’s annual GO debt.
That bill, which Malloy signed July 7, allows a 30-year maturity for municipal refunding bonds issued between July 1, 2017, and July 1, 2022, regardless of the final maturity of the refunded bond. An issuer need not meet the present value savings requirement to avoid amortization structure limitations, and the loan may be secured by a statutory lien on all revenues the issuer receives from tax levy and collection.
It passed as an under-the-radar series of amendments to an omnibus bill that the state Senate passed at 3 a.m. in early June.
While wary of distressed issuers pushing debt out further, Alan Schankel said such a restructuring could help Hartford given its shortage of options.
“It should be an arrow in their quiver but not the only one,” said Schankel, a managing director at Janney Capital Markets.
Douglas Gillette, chairman of the municipal finance practice group at law firm Day Pitney LLP in Hartford, warned about issuers using restructurings as a crutch.
“It’s a fiscal tool that can be very much misused,” Gillette said at a Sept. 15 University of Connecticut School of Law symposium on municipal distress. “There’s such a potential for abuse.”
Since a 2002 state law threw out many amortization requirements, said Gillette, “you saw a pattern of a lot of what they call scoop-and-toss refundings. Eventually that comes home to roost.”
Bronin said Hartford's 78% rise in debt service between 2006 and 2015 -- while its fund balance reserve plummeted 34% -- painted the city into a corner.
"Debt restructuring gave us a little bit of room, a couple of years of breathing space, but left us with an enormous amount to climb on the back end," said Bronin.
Bronin, the mayor since January 2016 and Malloy’s former chief counsel, has said that roughly $40 million of state aid, bondholder concessions and the reworking of municipal contracts are all essential for the 123,000-population capital city to avert a Chapter 9 filing.
Malloy would have to authorize such a filing. The mayor also faces headwinds from some City Council members.
The city faces a deficit of up to $65 million for fiscal 2018 and projects an $83 million gap within five years. Debt service is expected to rise to $57 million in FY2019.
Population and business are in decline. Mainstay insurer Aetna Inc. is relocating its headquarters from Farmington Avenue, west of downtown, to New York.
Hartford’s most recent available general fund balance is $15.2 million, according to S&P.
The city faces a deficit of up to $65 million for fiscal 2018 and projects an $83 million hole within five years.
State aid is in question, given the political gridlock at the capitol. Malloy has run the state through a series of executive orders since July 1. Malloy, a Democrat, has said he would veto a Republican-crafted $40.7 billion biennial budget. Under the GOP plan, Hartford would get a lot less.
“We believe passage of an appropriate state budget is an important step in moving forward towards constructive resolution of the current situation,” said Assured. “We are committed to working constructively with the city and the state and believe we can help return Hartford to a sustainable financial footing.”
Assured opposed the attempted bankruptcy of state capital Harrisburg, Pa., in October 2011. There, the City Council filed under Chapter 9 over the mayor’s objections, but a federal judge negated the filing six weeks later, citing a restrictive state law.
Assured and other creditors eventually agreed to a recovery plan for Harrisburg that a state court approved late in 2013.
S&P Global Ratings and Moody's Investors Service rate Hartford's bonds six and seven notches, respectively, below investment grade. S&P on Sept. 14 downgraded city GOs four notches to an underlying B-minus, two days after Moody's dropped Hartford two notches to Caa1. Neither Fitch Ratings nor Kroll Bond Rating Agency rate Hartford's bonds.
S&P also put the city on credit watch with negative implications and dropped its rating on the lease revenue bonds of the Hartford Stadium Authority, which owns and operates minor league baseball Dunkin' Donuts Park, by three notches to B-minus from BB-minus.