PROVIDENCE, R.I. -- Hartford’s latest multiple-notch bond rating downgrades by Moody’s Investors Service and S&P Global Ratings did not surprise the mayor of Connecticut's capital.
“The rating agency actions reflect the reality we’ve been emphasizing for many months, which is that a truly sustainable solution for Hartford is going to require the participation of all stakeholders,” Luke Bronin said Tuesday night after Moody’s and S&P pile-drove the city’s already junk bonds to Caa3 and CC, respectively.
“That’s why we have begun discussions with our large bond insurers, and why we began direct outreach to bondholders on a call this week."
Bronin earlier this month warned the city could file for bankruptcy within 60 days.
S&P’s drop was four notches from B-minus while Moody’s lowered the city two notches from Caa1. Moody’s outlook is negative while S&P placed the city on credit watch with negative implications. Both agencies delivered four-notch downgrades last fall. Neither Fitch Ratings nor Kroll Bond Rating Agency rate Hartford’s bonds.
The downgrades came one day after Bronin and the city’s restructuring advisor, Greenberg Traurig LLP, held a brief call with bondholders.
Insurers Assured Guaranty Municipal Corp. and Build America Mutual, who wrap a majority of the city's general obligation bonds, met recently with Bronin and members of Gov. Dannel Malloy’s staff and said they are open to a debt restructuring, although Bronin is said to be wary about any scoop-and-toss approach enabled by a new state law.
“A default, a distressed exchange, or redemption appears to be a virtual certainty," said S&P analyst Victor Medeiros.
S&P said it could lower Hartford to D if the city executes a bond restructuring or distressed exchange, or files for bankruptcy.
“In our view, the potential for a bond restructuring or distressed exchange offering has solidified with the news that both bond insurers are open to supporting such a measure in an effort to head off a bankruptcy filing,” said S&P.
“Under our criteria, we would consider any distressed offer where the investor receives less value than the promise of the original securities to be tantamount to a default.”
S&P similarly lowered the lease revenue bonds of the Hartford Stadium Authority, which owns and operates the city's minor-league baseball Dunkin' Donuts Park.
Moody’s said its downgrade “reflects increased likelihood of default as early as November and a higher probability of significant bondholder impairment, given impending bankruptcy.” Hartford has a $26.9 million debt-service payment due Oct. 31.
Hartford, in its most recent comprehensive annual financial report, for the year ending June 30, 2016, reported $683 million of general obligation debt.
According to Moody’s, its new rating reflects its expectation that bondholders will recover 65% to 80% of principal, “in light of the city's large structural deficits that will require relief from multiple sources.”
In addition, Moody’s cited uncertainty from Connecticut's budget impasse and whether the new state spending plan, when ultimately passed, would include the additional $40 million in aid Bronin requested.
Malloy has run the state by executive order since July 1 in the absence of a budget.
Ramirez & Co., in a commentary, recommended selling Connecticut GOs and buying University of Connecticut GOs at a spread of 65 to 67 basis points over 10 years.
“UConn GOs are unsecured university obligations and should over time outperform state of Connecticut GOs,” Ramirez said.
Budget talks at the state capitol broke down Tuesday night, virtually guaranteeing that Malloy must issue a more austere order on Oct. 1. The Democratic governor is expected Wednesday to veto a Republican-written $40.7 billion biennial budget that passed Sept.15 with a handful of votes from the legislature's majority Democrats.
Under Malloy's own budget plan, Hartford would stand to lose about $49 million in payments in lieu of taxes and municipal revenue sharing grant payments it otherwise would receive in October, according to S&P.
Bronin also said the city needs bondholder relief and labor concessions. He encouraged holders to direct concerns or questions directly to its financial and legal advisors, Rothschild & Co. and Greenberg Traurig.
Because the call was open to all holders and insurers without confidentiality restriction, the city limited the call to public information and did not take questions, according to city Treasurer Adam Cloud.
“Although we were limited in what we could say, we viewed this call as a necessary first step in our discussions with bondholders,” Cloud said.
According to Municipal Market Analytics, Hartford's woes could affect other Connecticut municipalities.
“MMA continues to believe that local Connecticut paper is carrying at least modest underperformance risk at present because of Hartford’s potential default and/or bankruptcy,” MMA said. “While related credit spreads are still reasonably tight, investors needing to raise cash should strongly consider picking Connecticut locals to sell.
“New purchases should be considered only at excess spreads to current offerings.”
A Hartford default or bankruptcy would probably force higher borrowing costs on other Connecticut cities, MMA added.
“While similar contagion phenomena were quickly dispelled in Michigan following Detroit’s bankruptcy, there are meaningful reasons to believe Connecticut will experience a more lasting penalty on its local issuers,” said MMA.