Connecticut’s deal to assume capital Hartford's debt payments – up to $40 million annually stretched out over two decades -- triggered an immediate boost to the city's credit standing.
S&P Global Ratings on Tuesday, within hours of Hartford Court of Common Council approval of the deal, placed the city's CCC junk rating on credit watch with positive implications.
"In our view, as it currently stands, there is a one-in-two likelihood that we could raise our ratings on Hartford and related debt obligations in the next 90 days with potentially significant elevation of issue credit ratings," said S&P analyst Victor Medeiros.
Moody's Investors Service also rates Hartford at junk level, Caa3, and revised its outlook in January to developing from negative.
Under a so-called contract assistance agreement that the city’s Court of Common Council authorized Monday night, Connecticut will direct how Hartford refinances its debt. The backstop will not come in one lump sum.
In addition, a new state oversight board must approve budgets, new bonding and labor agreements.
Hartford has roughly $550 million of general obligation debt. The deal will enable Hartford to make its $11 million debt payment this week and a further $1 million payment in late June.
“Legislators of both parties chose to build a new partnership, and we welcome that new partnership,” Hartford Mayor Luke Bronin said after the council vote.
According to Medeiros, the city's debt structure will not change immediately.
"Annual contract assistance payments would constitute a full faith and credit obligation of the state and be considered annually appropriated and come directly from the state to the trustee for the life of the bonds," he said.
The deal should ease bondholder fears about bankruptcy, according to bond analyst Alan Schankel.
“It sends a signal to investors that Connecticut will not let its troubled municipalities, particularly its capital, default,” said Schankel, a managing director at Janney Capital Markets.
The state oversight is also significant, he said.
“There’s a tradeoff and I’m anxious to see anxious that oversight will be over time,” said Schankel. “Hopefully it will be pretty impactful.”
Bronin and state officials expect to sign the agreement within days.
The $41.3 billion biennial state budget lawmakers passed last fall enables fiscally strained municipalities to apply for assistance in exchange for accepting certain reporting and oversight obligations under the nascent Municipal Accountability Review Board.
MARB began its official oversight of the city one month after Bronin and the city sought assistance. The board designated Hartford a Tier III municipality.
In December, S&P raised its rating on Hartford to CCC from CC while removing the ratings from credit watch with negative implications. Neither Fitch Ratings nor Kroll Bond Rating Agency rate Hartford’s bonds.
Despite the state’s own budget strife and shaky credit, absorbing the additional $40 million annually should not strain Connecticut, said Schankel.
Connecticut faces a nearly $200 million deficit for this fiscal year and has received numerous general obligation downgrades over the past two years because of its budget imbalance and high pension and bond debt.
“I don’t mean to dismiss $40 million, but it’s not a huge number in the overall context,” said Schankel.
Insurers Assured Guaranty and Build America Mutual wrap about 80% of the city's outstanding bonds. Messages seeking comment were left with Assured and BAM.
According to Bronin, more heavy lifting awaits Hartford short-term.
“We can see a path to balanced budgets for the next five years,” said the mayor, who took office in the 123,000-population city in January 2016. “Those budgets will be very tough and very tight, but for the first time in decades, we will be able to look people in the eyes and tell them that their capital city is looking at balanced budgets instead of a sea of red ink.”
Even as they approved the package Monday night, some council members were skittish about the state stepping in.
“I am really, really leery about somebody else paying our bills,” said Councilwoman rJo Winch.
Another open question is the situation in Connecticut’s other struggling large cities. Mayors Toni Harp and Joe Ganim of New Haven and Bridgeport, respectively, issued a joint statement Friday objecting to the Hartford deal and saying that Connecticut traditionally short-changes its cities.
“State officials have not heard the last demand for increased municipal aid, especially since other Connecticut cities, such as New Haven and Bridgeport, are also under fiscal strain,” said Stephen Eide, a senior fellow with the Manhattan Institute for Policy Research.
According to Schankel, though, the Hartford agreement has far-reaching benefits.
“I’ve been reading about New Haven and Bridgeport saying it’s unfair, but I think it helps everybody,” he said.