Bondholders and bond insurers will have a lot to say in Hartford
HARTFORD, Conn. -- While Hartford Mayor Luke Bronin awaits state aid from a Connecticut legislature that still can't pass a budget, another significant event looms.
"Look, I hope that our bondholders will recognize the need for, you know, the collaborative participation of all stakeholders to try to achieve a long-term sustainable plan," Bronin said Friday after his keynote speech at the University of Connecticut School of Law symposium on municipal distress.
Bronin, the capital city's mayor since January 2016 and former chief counsel to Gov. Dannel Malloy, 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 bankruptcy filing.
Over the summer he hired law firm Greenberg Traurig LLP to weigh restructuring options.
Bronin said the diminished aid in the Republican-crafted $40.7 billion biennial budget, which the legislature passed before dawn on Saturday and which Malloy has promised to veto, would push Hartford into Chapter 9.
S&P Global Ratings and Moody's Investors Service rate Hartford's bonds six and seven notches, respectively, below investment grade.
S&P last Thursday downgraded city GOs four notches to B-minus -- just as state lawmakers at the capitol complex were in one of the many mad scrambles of late over the budget. Two days earlier, Moody's dropped Hartford two notches to Caa1.
Neither Fitch Ratings nor Kroll Bond Rating Agency rate Hartford's bonds.
Insurance, primarily through Assured Guaranty Municipal Corp. and Build America Mutual, covers roughly 80% of the city's outstanding bonds. Hartford has about $550 million of debt overall, mostly general obligation.
Municipal Market Analytics expects the monolines to lean on City Hall to pursue an out-of-court debt restructuring rather than "an extended court battle in which legal fees consume much or all of the city’s potential savings and where capital market access for other distressed cities in the state may be compromised."
Still, said MMA, "The mayor’s strong advocacy of bankruptcy as the better way should force Connecticut bondholders to assume that a Hartford bankruptcy is the base-case scenario and that Connecticut state and local bonds will underperform the general market through year end, at least."
Daniel Berger, Municipal Market Data senior analyst, said "very little" visible Hartford bond activity exists.
However, according to Berger, $1.4 million of Hartford lease debt, which carries a 5% coupon and matures in February 2036, traded at a yield of 11.66%, or 915 basis points above MMD's calculated AAA-rated security at the same maturity.
Malloy would have to authorize any bankruptcy filing. Whether Bronin needs the approval of the City Council -- some of whose members oppose bankruptcy -- is unclear.
When Bridgeport, Conn., filed for Chapter 9 in 1991, the council objected to Mayor Mary Moran's petition. Conversely, the Harrisburg, Pa., council in 2011 filed for bankruptcy over the objections of Mayor Linda Thompson. In each case, however, a federal judge negated the filing and rendered moot any internal disputes.
Hartford's most recent available fund balance is $15.2 million, according to S&P.
Bond insurers can play several roles in distress mediation, said William Goddard, a partner with law firm Day Pitney LLP. "They have very special rights," he said. "They're very important players."
According to Goddard, they may speak on behalf of bondholders while making payments and be entitled to fee reimbursement where it would be difficult for other creditors to do so. In addition, they may have wrapped in a secondary market with no promises, be averse to employees and pensioners, and can fight a bankruptcy petition.
Michael Imber, a senior director with the public sector service group of workout firm Alvarez & Marsal, urged municipal issuers to be transparent.
"Communicate, communicate, communicate with all of the stakeholders, and if you're carrying a big debt, talk to the bondholders," said Imber, who advised major creditors during the bankruptcy cases of Detroit, Jefferson County, Ala., and Mammoth Lakes, Calif.
"Talk to your bond insurer if your bond insurer is covering your issues. And if you walk in and explain early you're having problems, here are the facts, here's our vision of how we're going to come out if this, here's what we don't know, you will get a lot more cooperation.
"Be honest with your creditors, be honest with your stakeholders. Share the bad news, share the good news."