STUMP » Articles » Here Comes the Junk: Hartford Downgraded, State Says Get It Together » 12 July 2017, 12:35

Hartford Debt Dropped To Junk Bond Status By Standard & Poor’s:

Standard & Poor’s downgraded Hartford debt to junk bond status late Tuesday, less than a week after the financially troubled capital city hired a New York law firm with expertise in restructuring municipal finances.

The Wall Street ratings agency downgraded most city of Hartford outstanding debt to BB, a level that’s classified as risky, also known as non-investment-grade, or junk, from BBB-. That reflects a strong possibility that Hartford could default on its debt or renegotiate it to pay bondholders less money.

The move, announced on the S&P website just after 4 p.m., follows a series of downgrades by ratings agencies over the last year, as Mayor Luke Bronin has warned that Hartford could file for bankruptcy protection if it doesn’t receive tens of millions of dollars in additional aid from the state and concessions from unions.

S&P also downgraded Hartford Stadium Authority bonds, and kept Hartford under a negative watch Tuesday, even after lowering the rating to junk status — meaning more downgrades could happen soon.

Yesterday, I went out for lunch with an ex-colleague, and we were talking about Hartford’s finances (I work in downtown Hartford) — one of the issues we were talking about was needing to force the suburbs to merge with Hartford itself… which is teeny tiny. That would be extremely controversial, to say the least, but the other option is having the state take it over.

Which might be the best option — this is the state capital, after all. And one of the reasons for Hartford’s financial troubles is that there is so much tax-free property in the city as all these state government buildings are here.

Prior downgrades:
May 2017: S&P – Downgraded to BBB- – step above junk
September 2016: S&P – Downgraded to BBB – a 4 notch downgrade, from prior of A+

A 4-notch drop is huge. Dropping from A+ (solidly, supposedly, in investment grade territory) to BB in less than a year is quite rapid. Consider how long Illinois and New Jersey ratings have slowly declined.

Here is S&P’s current definitions – I will pluck out A and BB particularly:

A An obligation rated ‘A’ is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher-rated categories. However, the obligor’s capacity to meet its financial commitments on the obligation is still strong.
….
BB An obligation rated ‘BB’ is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions that could lead to the obligor’s inadequate capacity to meet its financial commitments on the obligation.

So get those concepts in your mind.

Those above were S&P. If you Check out Moody’s history; they downgraded Hartford to junk in October 2016 and recently put the rating in review at the end of May — it could be downgraded further.

STATE GUARANTEES?

In going digging for the history of Hartford’s downgrades, I came across this piece from May 2016:

Looking ahead
Hartford’s bond ratings, while they’ve taken their knocks, are still considered investment grade by both Standard & Poor’s and Moody’s, but the city could face further downgrades if it doesn’t close its deficits.

One positive aspect that’s regularly cited by S&P and Moody’s is the “stabilizing presence” of state government in Hartford’s backyard.

Though neither ratings company states it directly, it may hint at the notion that the legislature, should Hartford truly face insolvency down the road, may opt to bail out its Capital City.

I believe the rating agencies have determined that the state may not be relied upon, because it has its own financial crunch and then stuff like the following section.

GOVERNOR: HARTFORD GET IT TOGETHER

Here’s the Connecticut governor, who has decided not to run for re-election next year (partly because of the financial mess, I believe) telling Hartford that they’ve got to fix itself before it gets gifts.

Malloy: State Will Help Hartford, But Capital City Needs To Help Itself First

Gov. Dannel P. Malloy said Friday [July 7] that the state is willing to help Hartford avoid bankruptcy but the capital city also must get its own financial house in order.

Malloy was reacting to the decision by Hartford Mayor Luke Bronin to hire an international law firm with expertise in municipal bankruptcies as the city also seeks alternatives to avoid a fiscal filing that would generate headlines far beyond Hartford.

Malloy has proposed offering millions more in state aid to the capital city in his budget proposal, but that has not been approved by the legislature as the state has entered the new fiscal year in a continuing budget stalemate.

“I don’t know whether we can be all things to all people, but I think Hartford has to, first and foremost, help itself,” Malloy told reporters Friday at the state Capitol. “But we should play a role. I think we need to do that not just in Hartford, but in Bridgeport and New Haven and other urban environments and Waterbury. There’s a role for us to play.”

The state budget is crucial for Hartford, which has sought tens of millions of dollars in additional aid as it faces a budget gap as high as $65 million. For months, Bronin has raised the specter of bankruptcy, but he said this week that no decisions have been made.

As governor, Malloy has the power under state law to approve any potential Hartford bankruptcy. But he said he did not want to speak prematurely.

“There’s no request for that,” Malloy said. “I don’t think they’re in a position to say definitively what they are going to do. I’m certainly not going to prejudge anything. That should be viewed as a last resort, not as a first.”

That was the most recent statement. From earlier posts I did, you can see his earlier statements.

From last month, we have the following items from the Wall Street Journal:

Democratic Gov. Dannel Malloy last week said Hartford and the state Legislature would have to accept more oversight of the city’s finances in exchange for state assistance. “I do not support additional moneys going to our challenged urban environments without a review process,” Mr. Malloy said.

Yeah, giving up control to the state, as what happened with Detroit, is probably not appealing to city politicians.

Given that Hartford really is up against the wall, the state hasn’t passed a budget (gee, that’s familiar), and it was already shopping around for bankruptcy lawyers…. yeah, the S&P move ain’t much of a surprise.

RELATED LINKS

Zero Hedge: Connecticut Capital Hartford Downgraded To Junk By S&P

The Atlantic: What on Earth Is Wrong With Connecticut?

6 July: Hartford Hires Bankruptcy Lawyer As City Officials Weigh Options

Letter from the 6 Democrats on the Hartford City Council in response: Hartford Council Dems: Bankruptcy May Be Unavoidable

Compilation of Connecticut posts