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

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.

Comments

gregga777 Tue, 09/26/2017 - 17:02 Permalink

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 Tue, 09/26/2017 - 17:01 Permalink

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.  

roddy6667 JRobby Tue, 09/26/2017 - 23:19 Permalink

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.

In reply to by JRobby

Omen IV Tue, 09/26/2017 - 17:01 Permalink

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!

SantaClaws Tue, 09/26/2017 - 17:04 Permalink

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.

roddy6667 HRH Feant2 Tue, 09/26/2017 - 23:09 Permalink

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.

In reply to by HRH Feant2

Offthebeach Dutch1206 Tue, 09/26/2017 - 18:00 Permalink

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.

In reply to by Dutch1206

TuPhat Tue, 09/26/2017 - 17:10 Permalink

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 Tue, 09/26/2017 - 17:11 Permalink

Are they ideologically incapable of making service reduction decisions, or intellectually incapable, or criminally incapable, or politically incapable?Or some combination thereof?

SDShack Tue, 09/26/2017 - 17:14 Permalink

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!

roddy6667 NastyBrutishNTall Tue, 09/26/2017 - 23:03 Permalink

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.

In reply to by NastyBrutishNTall