Connecticut Capital Hartford Downgraded To Deep Junk, S&P Says "Default Virtual Certainty"

Tyler Durden's picture

Two months after S&P downgraded the state capital of Connecticut, Hartford, to junk, when it cuts its bond rating from BB+ to BB- citing growing liquidity pressures and weaker market access, the city which has been rumored is preparing to file for bankruptcy protection and which has seen an exodus of corporations and businesses in recent months, just got more bad news when S&P downgraded it by a whopping 4 notches deeper into junk territory, from BB- to CC, stating that "a default, a distressed exchange, or redemption appears to be a virtual certainty."

"The downgrade to 'CC' reflects our opinion that a default, a distressed exchange, or redemption appears to be a virtual certainty," said S&P Global Ratings credit analyst Victor Medeiros.

The rating agency also warned that it could take additional action to lower the rating to 'Default' 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. 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.

In short: while Chicago has so far dodged the bullet, the capital of America's richest state (on a per capita basis), will - according to S&P - be also the first to default in the coming months.

Full S&P note below:

Hartford, CT GO Debt Rating Lowered Four Notches To 'CC' On Likely Default

 

S&P Global Ratings has lowered its rating four notches to 'CC' from 'B-' on Hartford, Conn.'s general obligation (GO) bonds and Hartford Stadium Authority's lease revenue bonds. The ratings remain on CreditWatch with negative implications, where they were placed on May 15, 2017. At this rating level and due to the characteristics of the city's appropriation-supported debt, we believe its appropriation and GO debt share similar risk and have therefore made no notching distinction. We could differentiate the GO and appropriation ratings again in the future based on our view of their relative vulnerability to nonpayment.

 

"The downgrade to 'CC' reflects our opinion that a default, a distressed exchange, or redemption appears to be a virtual certainty," said S&P Global Ratings credit analyst Victor Medeiros.

S&P Global Ratings could take additional action to lower the rating 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. 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. The mayor's public statement citing the need to restructure even if the state budget provides necessary short-term funds further supports our view that a restructuring is a virtual certainty. In our view, the city is vulnerable to payment interruptions due to its near-term liquidity crisis. The downgrade also considers the ongoing state impasse in adopting a budget and providing the necessary liquidity support for the city in a timely manner to avoid a payment disruption. The downgrade reflects the likelihood that there will not be any agreement on a bipartisan budget before Oct. 1, when planned municipal cuts are scheduled to take effect.  

 

The state of Connecticut is facing its own fiscal challenges, entering the fiscal year without an enacted budget. With no budget resolution in place, the governor recently revised an executive order designed to keep the government operating in balance for the fiscal year. To eliminate the state's 2018 projected deficit, the governor reduced total aid to municipalities by a significant amount; 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. The city's is scheduled to repay short-term tax anticipation notes (TANs) on Oct. 31, and has the next debt service payment scheduled for Nov. 15.

 

Although we do not see a bankruptcy filing by the city as likely, should a debt exchange proceed, given the state budgetary impasse, and the uncertainty surrounding any exchange offer, the risk of a bankruptcy filing remains as city officials have publicly indicated they are actively considering bankruptcy. The fact that the city hired a bankruptcy attorney in July 2017 lends credence to the idea that bankruptcy is potentially on the table. On Sept. 25, the city met with bondholders to discuss future repayment options. Such a meeting, regardless of the outcome, indicates a public desire to adjust debts and to have met with creditors; both of which are elements of eligibility to file for Chapter 9 bankruptcy. Although state law still requires approval from the governor, and consent from the treasurer and general assembly, this action heightens the likelihood that Hartford will formally begin that process.

 

Hartford's budgetary performance has been weak for several years, and the management environment remains constrained due to a structurally imbalanced budget with no credible corrective plan. The city's fiscal 2017 general fund balance is projected to close with a negative balance of $9.9 million on a generally accepted accounting principles basis, or about 1.8% of general fund expenditures. Hartford's adopted fiscal 2018 (fiscal year-end June 30) budget totals $612 million, an increase of roughly 10.8% from the previous year. Despite a 3% increase in general fund revenues, the budget gap remains sizable at $49.6 million, or about 8% of budgeted expenditures. Beyond the current fiscal year, Hartford faces significant fiscal challenges with rising fixed costs and limited revenue-raising ability. Based on its projected budget, the gap expected for fiscal 2019 is in excess of $49 million (more than 8% of estimated expenditures) and increases to more than $69 million by 2021.  

 

Along with the operational challenges mentioned, the city's weak budgetary performance has severely eroded liquidity. The decline in cash resulted in Hartford having to issue TANs in fiscal 2017 to cover operating expenditures through October in anticipation of property taxes and state revenues (a period which crosses fiscal years).

 

S&P Global Ratings expects to resolve its CreditWatch action on the long-term rating within 90 days. We believe there is a one-in-two likelihood of another downgrade if the city were to file for bankruptcy or pursue a restructuring that offers bondholders less than the original promise of the bonds. Although unlikely, if timely budget adoption translates into stabilized liquidity, no exchange occurs, and a credible plan toward long-term structural support is identified, we could remove the ratings from CreditWatch. Over time, upward rating movement will depend on the city's ability to achieve and sustain structural balance.

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YUNOSELL's picture

Default imminent -- All the other cool cities are doing it

gregga777's picture

We've got the money so fuck all of you stupid bond holders.

Wang Dang SP's picture

Pension defaults soon to follow.  When you need a bailout, GO BIG!

auricle's picture

could have said the same thing back when Obama was President. 

Bastiat's picture

Maybe they could make some money hosting a crisis actor convention--there are some people in the state with experience at that sort of thing.

Déjà view's picture

Financial Hurricane...where is FEMA et al...

Omen IV's picture

Hartford need a NFL Franchise to revitalize the city

No flags allowed!

shankster's picture

NFL teams should be at a discounted price now.

all-priced-in's picture

Buy one NFL team at full price get an NBA and MLB team for free.

Not valid with prior purchase.

blue51's picture

Bring back the Hartford Whalers .

shankster's picture

Roman type gladiator arenas.

venturen's picture

Chicago is already doing that with gun battles

DeadFred's picture

Yes but look at at the low caliber of the players. Horrible shots every one of them

JRobby's picture

Insurance "Executives" vs. Hedge Fund Managers

The winners get to hold the bonds to maturity. The losers are run through a wood chipper.

CRM114's picture

Well, they're already on their knees - probably a good fit!

jaxville's picture

I don't get it.  Who buys such municipal debt?  Is it their own pension funds or something like that?

gregga777's picture

They should hire the financial and accounting industry's crack cyber security Ex-spurts from Equifux and Deloitte & Douche to advise them on how to screw everyone out of what they owe them. I can see it now:

"Hartford, Connecticut, was hacked and everything of value was stolen over the past decade by Russky, Iranian and North Korean hackers. The hack was just discovered by crack cyber security Ex-spurts from Equifux and Deloitte & Douche."

Dutch1206's picture

I can't help but laugh.  I grew up in Connecticut and watched Dannel P. Malloy run the state into the ground.  I'm sure he'll get voted back in.  Greatest job in the world really.  Can fail day in and day out and still get paid by the tax payer.  

Lumberjack's picture

Fuck Yale, Fuck Wagner Forest Management (The other Enron and their windmills), also their good buddies, Sino Forest.

loves the truth's picture

Ct and RI example of democratic communit government. Both state are st the bottom for economy

JRobby's picture

But there are many lovely trees and colonial homes painted in traditional colors there.............

roddy6667's picture

I lived there for 65 years and packed my bags. First I looked at the Raleigh-Durham area. Then I decided to become a perpetual traveler. Suits me better.

However, if anybody is looking to escape from a decaying hometown, I would recommend the area. Look at homes on Realtor.com and Zillow. Zillow also has the property tax history. Go to the city hall and other public buildings. Look at the schools and universities. Look at the infrastructure, is it maintained? Are they building new?

The Research Triangle brings two levels of jobs to the area. First are the high-tech and medical jobs with very high pay. Second are the jobs that support these people. Somebody needs to build and repair their homes, fix their cars, run the restaturants, teach in the schools, all that.

Homes are cheap. You can buy a 3BR 2BT ranch an easy commute to city center for under $100,000 if you shop around. Property taxes are under $1200 a year. 

Worth a look.

loves the truth's picture

The criminals did a great job in pulling off the sandy hoax

Omen IV's picture

Time to do the right thing - flip the keys to the city to BLM - so they can manage everything

The cops stand down and everything will be .... better!

SHEEPFUKKER's picture

I was gonna buy the bonds at junk status, but not deep junk status. Oh, fukk no. //

shankster's picture

What goes around comes around...every fug-gin time.

SantaClaws's picture

But don't touch our high public salaries, benefits, and laughably high pensions.  Instead, pass the debt on to the taxpayers and claim we have no choice, ha ha.

Dutch1206's picture

Hartford has no tax payers.  You can count on one hand the number of people in Hartford who aren't on some form of government assistance.  

Vilfredo Pareto's picture

I did wonder how a high tax high median income area could have financial problems.  That's city democrats for ya.  Democrat thinking is that utopia can be achieved if we just tax a bit more and spend a bit more 

HRH Feant2's picture

That works well until they run out of other people's money. Fucking communists. They never understand.

roddy6667's picture

I live in China, and they don't have these problems, and they have a socialist government here. Joe Sixpak and Larry Lunchbox are not allowed to vote themselves money from the public treasury. This is a problem unique to democracy, and it is the reason why all domocracies fail. There are more lazy people than hard-working ones. There are more dumb people than smart ones.  Eventually, the majority will destroy the whole system.

what happened's picture

 

 

There is a quiet and uniform corruption in Connecticut that runs deep among the government workers and goes all the way to the top.

Offthebeach's picture

The few taxpayers should be on a calendar.   January, Mrs. Wolchowski, 88, wife of deceased SSargent Stanley Wolchowski, prisonered in her Maple Street home( expanded steel window grills, quad locked steel door with tripple 3" throw bolts).

And soforth,  until the calendar gets to May and then fill in the rest of the months with tips on applying pressure to various arteries.  July would be Femoral Artery month, August Carotid and so forth.

JRobby's picture

State employees snoozing in white pickups dreaming of all the $$$$ they will enjoy in retirement...........................

(Laugh Track Deafening !!!!!)

shankster's picture

Deep junk.. that sounds like the Miami-Dade landfill.

Freddie's picture

Miami-Dade is a land fill.

It is like Havana-Haifa without the "charm."

TuPhat's picture

There is no choice really.  The rich must stay rich.  We can't have rich people being poor people, they don't know how to do it right.

CRM114's picture

I'm sure they manage, they just need a lot of practice. 

Maybe an extreme Poverty Bootcamp to get them started.

If they still feel after that they can't live as poor people, perhaps the 'live' bit should be changed, rather than the 'poor' bit.

CRM114's picture

Are they ideologically incapable of making service reduction decisions, or intellectually incapable, or criminally incapable, or politically incapable?

Or some combination thereof?

didthatreallyhappen's picture

all of the above because.................LIBERALS ARE FUCKING PIECES OF SHIT

what happened's picture

 

They are mining children, many parents who are competent have their children removed and funds are supplied by the federal government.  Does it take tens of millions of dollars to run a program serving approximately 25,000?  http://www.huffingtonpost.com/entry/the-2017-child-protective-services-c...

Who is really profittng from this program?

SDShack's picture

Did I read this right? $10Milliion deficit which is 1.8% of the general fund expenditures. You mean to tell me they can't come up with 1.8% in "real" budget cuts? They can't live on 98+% of their existing budget, so their only result is bankruptcy? Un-fuckin-believable!

NastyBrutishNTall's picture

They are criminally incapable of making those cuts. The last mayor was arrested on corruption charges. Nothing to see here....

 

roddy6667's picture

Oh, the good ole days with Hartford mayors. Don't forget Mayor Carrie Saxon-Perry, elected in 1987. She was a black, lesbian, Communist, homeless mayor. She didn't have a place to stay for a long time and slept in her office. Later somebody fixed her up with a place in a neighborhood where there is gunfire on most summer nights. 

It's been a long time since Hartford had responsible government.

JRobby's picture

Its really hard! All of the money has been promised!

gilhgvc's picture

if you still live anywhere near there YOU are the weakest link...goodbye

venturen's picture

CT has a law that public employees can't be fired....so when a school goes from 300 to 100 students...same number of teachers

Tapeworm's picture

Or from 600+ to a few urchins in  of a photo shoot line at MoldManor Sandy Hook elementary screwel.