The downgrade grinder continues at Moody’s

By Cate Long
October 26, 2012

Moody’s released a summary of its third-quarter rating actions today and the downgrade grinder continues to turn in muniland. Downgrades across U.S. public finance sectors totaled about $75 billion in the third quarter of 2012, with four issuers accounting for over 70% of the debt downgraded: The Port Authority of New York and New Jersey,  the Puerto Rico Sales Tax Financing Corporation, the Commonwealth of Pennsylvania and the Chicago O’Hare Airport Enterprise.

With the exception of heavily indebted Puerto Rico, the other three issuers are household names, and their weakening credit profile might surprise some people. Here is Moody’s rationale for downgrading the four issuers. You may start to see some patterns (emphasis mine):

Port Authority of New York and New Jersey – Consolidated bonds downgraded to Aa3/Stable from Aa2/Negative;  $18.2 billion of total debt affected.

-The downgrade reflects the increased financing needs of nearly $2 billion through 2016 identified since the preliminary plan initially proposed in the Navigant Phase I report, primarily for World Trade Center development. It also factors the likelihood of significant growth in future capital needs to maintain key revenue-producing assets in a state of good repair in addition to a capital plan that could add $17 billion to the already $26.9 billion preliminary 10-year capital improvement program.

Puerto Rico Sales Tax Financing Corporation Senior and Subordinate Lien Sales Tax Revenue Bonds downgraded to Aa3/Stable from Aa2/Stable and A3/Stable from A1/Stable, respectively; $16 billion in debt affected.

-Increased risk associated with an escalating debt service structure which requires revenue growth to meet all debt service in the future.

- Growth challenges for the Commonwealth’s economy given the manufacturing sector’s decline in the face of  global competitive forces.

Commonwealth of Pennsylvania’s General Obligation Bonds downgraded to Aa2/Stable from Aa1/Negative, $13.16 billion in related debt affected.

- High combined debt position driven by growing unfunded pension liabilities, and a seven year history of significantly underfunding pension contributions that will be reversed slowly over the next five years.

- Rapidly growing pension contributions will absorb much of the commonwealth’s financial flexibility over the next five years, challenging the commonwealth’s ability to return to structural balance or make meaningful contributions to the depleted budget stabilization fund.

Chicago (City of) IL O’Hare Airport Enterprise – Third lien general airport revenue bonds downgraded to A2/Stable from A1/Negative;  $6.5 billion of total debt affected.

- The downgrade takes into consideration the airport’s high leverage and narrow financial margins as it navigates difficult economic and industry environments and construction risk inherent in its large capital construction plan. The collective risks associated with weak national economic growth, the bankruptcy status of American Airlines, and the large O’Hare Modernization Program are more appropriate to the A2 rating category given the airport’s financial margins and liquidity position.

All of these issuers are facing higher debt loads and increasing liabilities while their revenue sources are challenged. It’s a standard cash flow squeeze. This is usually why issuers are downgraded. For high debt-leveraged entities, slowing economic conditions are very challenging and constrict an issuer’s capital structure flexibility. All eyes on the downgrade grinder — muniland credit quality continues to slide downhill.

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