WASHINGTON - The $445 million of income tax bonds the District of Columbia plans to issue as soon as next week have received a AAA rating from Standard & Poor's - the first triple-A rating the district has ever obtained on any of its bonds.
The income tax bonds, which were authorized in legislation approved by the District Council in July, are a new debt tool that finance officials had hoped would provide higher ratings and lower interest rates.
With Standard & Poor's, they got their wish.
"We are very, very pleased," chief financial officer Natwar Gandhi said yesterday. "It's been quite a journey from 1997 when I came here and the city was near insolvency. And here we are now, basking in the glory of a triple-A rating. This is really a landmark achievement on the part of the district."
Marcy Edwards, senior financial policy adviser for the CFO's office, said she expects to receive ratings from Moody's Investors Service and Fitch Ratings as early as today and that the district plans to come to market with a negotiated deal next week dependent on market conditions.
The AAA rating covers $310 million of Series 2009A income-tax secured new-money bonds to finance capital projects and $135 million of Series 2009B income-tax secured refunding bonds to refund outstanding Series 2003 C and D general obligation bonds. The bonds are the first of a roughly $2.9 billion authorization the council approved last summer.
Analyst John Sugden said the Standard & Poor's rating - which has a stable outlook - reflects very strong debt service coverage at 30 times the district's projected fiscal 2010 revenues, with the maximum annual debt service occurring in 2022 based on estimates. It also reflects good historic growth, he said.
Sugden said that even if the current economic crisis hurts the district's income tax revenues, "we think it can withstand some short-term fluctuations."
"Although we expect total pledged revenues to decline over the next two fiscal years, coverage projections remain strong," Sugden said in a release. "Over time, we expect coverage to decline with the issuance of additional debt; however, legal provisions are adequate to ensure a sufficient revenue cushion that can absorb short-term fluctuations, while providing adequate debt service."
The district has good historical growth in pledged revenues, despite the significant volatility associated with individual revenue streams. The city also has a policy that sets aside debt service for the following fiscal year, and a mechanism to address shortfalls and interest rate fluctuations, which is a strength, the rating agency said.
The new rating from Standard & Poor's is significantly higher than the ratings on the district's GOs, which are rated A1 by Moody's and A-plus by Standard & Poor's and Fitch.
The income tax bonds are an alternative to issuing GOs and the district joins New York City and New York State, among other issuers, that currently sell bonds backed by income taxes. The Empire State Development Corp., for example, was able to obtain a AAA rating from Standard & Poor's for $310 million of personal income tax bonds it issued in October 2007.