S&P Global Ratings republished its four-notch downgrade of Hartford, Conn., to clarify that bond insurers Assured Guaranty Municipal Corp. and Build America Mutual Insurance are open to a traditional bond refinancing but not a bond restructuring or a haircut.

“We understand from the bond insurers that they are open to a traditional bond refinancing in an effort to head off a bankruptcy filing, but not a distressed exchange or bond restructuring where investors receive less value than the promise of the original securities,” S&P said Thursday.

Hartford Mayor Luke Bronin
"Our team is prepared to engage with all stakeholders who are interested in constructive discussions," said Hartford Mayor Luke Bronin.

Two days earlier, S&P downgraded Connecticut’s capital city four notches to a deeper junk CC. Moody’s that day dropped Hartford’s bonds two levels to Caa3, noting an “increased likelihood of default as early as November.”

Mayor Luke Bronin earlier this month said Hartford could file for Chapter 9 bankruptcy within 60 days. A key milepost if Oct. 31, when the city has a $26.9 million short-term tax anticipation note due. It next debt-service payment is due Nov. 15.

Assured and Build America Mutual Insurance, combined, wrap about 80% of the city's outstanding bonds.

Assured and BAM met Sept. 11 with Bronin, city Treasurer Adam Cloud, key members of Gov. Dannel Malloy’s administration and Lamont Financial Services Corp. president Robert Lamb, among others.

The insurers provided the city an option of $40 million level debt service payments over 15 years, with amortization to begin in 2033. They said the city could benefit from a new state law – the so-called scoop-and-toss bill -- that enables cities to push out the maturities of refunding bonds.

Hartford projects its annual debt service to spike to $49 million in fiscal 2019 and $69 million in FY2021, according to S&P.

Bronin held a brief bondholder conference call on Monday and fielded no questions.

“Our team is prepared to engage with all stakeholders who are interested in constructive discussions,” he said afterward. “We are interested in long-term solutions that leave the city with a path to sustained solvency and strength, without leaving future administrations to deal with the same kinds of challenges.”

S&P also said it could lower its rating to D if the city executes a bond restructuring or distressed exchange, or files for bankruptcy. “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 said.

Bronin has said the city needs state aid, bondholder flexibility and labor concessions to avoid a Chapter 9 filing.

The state budget is a huge variable. Democrat Malloy has run Connecticut by executive order since July 1, amid political gridlock.

Malloy on Thursday vetoed a $40.7 biennial spending plan that lawmakers passed Sept. 16 after a handful of Democrats voted for the Republican plan. Malloy said he would have to issue another executive order next week with more austere cuts to municipalities.

Also on Thursday, S&P placed the ratings of nine communities on credit watch with negative implications, citing the looming aid cuts. They are West Haven, New Haven, New London, Bridgeport, Hamden, Plymouth, Derby, Stratford and Waterbury.

This week's state budget talks stalled over a complicated deal to increase the annual tax on the hospital industry, which in turn would qualify the state for more federal Medicaid reimbursement.

Non-bankruptcy options for Hartford include increased reimbursements from Connecticut for its excessive tax-exempt property. The state has in recent years underfunded Hartford.

Roughly half the city’s property is tax-free, reflecting its status as a state capital. In addition, the city has a commitment of $10 million from insurance leaders Aetna Inc., Travelers Cos. and The Hartford, despite Aetna’s intention to relocate its corporate headquarters to New York.

Wayne County, Mich., provides recent precedent for reducing other post-employment benefits outside bankruptcy. The county, which includes the once-bankrupty city of Detroit, cut labor, retirement and healthcare costs through a recovery plan with the state providing flexibility. The county won back one of its investment-grade ratings.

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Paul Burton

Paul Burton

Paul Burton is the Northeast Regional Editor for The Bond Buyer and the author of the book "Tales from the Newsrooms." He is a sought-after public speaker and has appeared on radio and TV shows, including former CBS News White House correspondent Sharyl Attkisson’s public-affairs program, “Full Measure.”