Citing Connecticut’s establishment of a review board that could keep Hartford out of bankruptcy, Moody’s Investors Service revised its outlook on the capital city’s general obligation unlimited tax debt to developing from negative.

Moody’s on Tuesday affirmed its Caa3 rating for Hartford, well into junk.

The rating, said Moody’s, reflects the continued, though lessened, likelihood of default or bankruptcy by the 123,000-population city over the short term, “while there remains a possibility of significant bondholder impairment over the long term, given the city's distressed financial condition.”

Late last year, Connecticut established the Municipal Accountability Review Board. Hartford has requested designation as a Tier III municipality. Such a move, said Moody’s, would enable the state to provide significant state oversight and financial assistance.

Aetna Inc. headquarters in Hartford, Conn. on Tuesday, Nov. 22, 2016.
Insurance giant Aetna will remain in Hartford, said prospective new owner CVS Health. Bloomberg News

Tiers reflect degree of oversight.

“MARB's pending decision on the city's Tier III status, execution of a state debt assistance contract and the conclusion of negotiations with bond insurers and bondholders, as well as the city's detailed financial recovery plan will provide information material to assessment of the city's credit profile,” according to Moody's.

State Treasurer Denise Nappier and budget director Benjamin Barnes will co-chair the oversight panel.

Hartford Mayor Luke Bronin over the past year has floated bankruptcy as an option. Bondholder negotiations are ongoing.

Bronin, a Democrat, has formed an exploratory committee for governor. Fellow Democrat Dannel Malloy, who will give his State of the State address on Feb. 7 when the General Assembly reconvenes, is not seeking re-election.

Connecticut, which was four months late last year passing its biennial budget, has its own financial troubles. Rating agencies have hit Connecticut with a series of downgrades over the past two years, citing budgetary imbalance and high debt and pension liability.

Hartford could receive an upgrade, said Moody’s, if the review board designates the city as a Tier III municipality and executes a state debt assistance contract; the city develops a long-term financial sustainability plan; completes negotiations with bond insurers and bondholders that generate recovery of at least 80% of principal; and makes timely payments on all debt with expressed commitments to fully honor future obligations.

A bankruptcy filing, a default on debt or an indication that bondholder recoveries would fall below 65% of principal in a potential debt restructuring would lead to a further downgrade, according to Moody’s.

Insurers Assured Guaranty and Build America Mutual wrap about 80% of the city's outstanding bonds. Hartford, in its comprehensive annual financial report, for the year ending June 30, 2016, reported $683 million of general obligation debt.

On Dec. 14, S&P Global Ratings raised its long-term rating on Hartford GOs to CCC from CC while removing the ratings from credit watch with negative implications.

Moody’s on Jan. 25 downgraded Waterbury, a 108,000-population city about 35 miles southwest of Hartford, to A2 from A1 while retaining a stable outlook. The downgrade reflects Waterbury’s outsized leverage and fixed costs, said Moody’s.

“The city's financial position, though stable for many years, limits operating flexibility, especially in light of high dependence on state revenues,” said Moody’s.

Bridgeport and New Haven, Connecticut’s other large cities, are also under fiscal strain. The state’s own struggles could influence any discussion about aid, said Stephen Eide, a senior fellow at the Manhattan Institute for Policy Research.

“What these cities want is more no-strings-attached general treasury support,” said Eide. “But that’s a tough ask, given the numerous other claims now placed on state resources for retirement benefits, debt service, safety-net programs and so on.”

Hartford received good news three weeks ago when CVS Health, the prospective new owner of insurance giant Aetna Inc., said it would keep the company in Hartford, Aetna's home since 1853. Months earlier, Aetna said it would move to New York.

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