Connecticut’s legal pledge to assume payments of Hartford’s nearly $550 million of outstanding debt drove a super upgrade for the state capital city's bonds.
The issuer rating on the city itself remains at a speculative-grade level.
Moody’s Investors Service boosted Hartford general obligation bonds 13 notches to A2 from Caa3 Wednesday citing the Connecticut contract assistance agreement announced last week to assume responsibility for the city’s long-term debt payments.
“The A2 ratings on the City of Hartford's GO bonds reflects the strong legal provisions governing the state's obligation to make contract assistance payments on the bonds pursuant to a contract for financial assistance, and the essentiality of the state's commitment to its capital city,” said Moody’s analyst Marcia Van Wagner in her April 4 report. “The obligation to make the payments to Hartford is a full faith and credit obligation of the state.”
The deal, which was authorized by the Hartford Court of Common Council on March 26, means the state will assume bond obligations of up to $40 million annually stretched out through final maturity in the 2031 fiscal year.
The city loses significant autonomy: Connecticut, through its Municipal Assistance Review Board, will direct how Hartford refinances its debt and a new state oversight board must approve budgets, new bonding and labor agreement under the agreement.
"The rating is one notch off the state's GO rating to reflect the possible risk of payment interruption or reduction should Hartford file for bankruptcy," Moody's said.
Moody’s also concurrently assigned Hartford its B2 issuer rating, five notches away from investment-grade.
Janney Capital Markets municipal analyst Alan Shankel said he does not remember other upgrades as high or close to the 13-notch boost Hartford's bonds received in his more than four decades working in public finance. He stressed, however, that some outstanding Hartford debt is not included in state debt service payments such as the city’s stadium lease bonds. Moody’s doesn’t rate the stadium bonds sold to build a minor league baseball park, but if they were to get future ratings the debt would be likely tied into the B2 issuer rating, according to Shankel.
“I do think the state’s direct approach to backing the debt is positive, since the state was already providing debt service support indirectly,” said Shankel. “It is a clean approach which significantly reduces potentially corrosive uncertainty.”
S&P Global Ratings last week placed its CCC junk rating of Hartford on credit watch with positive implications.
“Today’s dramatic ratings upgrade underscores the importance of the comprehensive work we’ve done to put the City of Hartford on a sustainable path, through deep and difficult cuts, significant labor savings, the engagement of our business community and through a new partnership with the State of Connecticut,” Hartford Mayor Luke Bronin said in a statement. “Maintaining future stability depends on continued discipline, continued partnership with the State, and most of all on achieving real economic growth in the years ahead.”
In conjunction with the Hartford action, Moody’s also affirmed its A1 GO bond rating for the state, which has incurred multiple downgrades the past two years due to imbalanced budgets and a heavy pension burden. Connecticut is rated A-plus by S&P Global Ratings and Fitch Ratings and AA-minus by Kroll Bond Rating Agency.
“Fitch views the reassigned Hartford debt service requirements as modest within the state's $18 billion annual budget, with no measurable change to carrying costs,” said Fitch analyst Marcy Block in a report released Thursday afternoon, noting that the agreement is unlikely to have a negative credit impact for Connecticut. “A more widespread assumption of municipal debt obligations, currently believed by Fitch to be an unlikely scenario, would become a credit concern given the state's high debt load.”
Fitch does not anticipate a surge in municipalities seeking Municipal Assistance Review Board assistance, partly because of the strict conditions that are placed on local governments under MARB's oversight.