S&P raises Connecticut GOs to AA-minus citing finances, reserves

BY SourceMedia | MUNICIPAL | 11/22/22 11:36 AM EST By Chip Barnett

S&P Global Ratings raised the rating on Connecticut's $17.7 billion of general obligation bonds to AA-minus from A-plus.

"The upgrade on the state's GO debt reflects our view of Connecticut's sustained positive financial results and building of high reserve levels during a recent period of economic and revenue growth," S&P Global Ratings credit analyst Thomas Zemetis, said in a statement released Tuesday.

Zemetis also noted the state is "demonstrating its commitment to structural budget balance and curbing future growth of the state's very high debt, pension, and other postemployment benefits liabilities, which we expect will continue in future biennial budgets."

The upgrade followed rating increases in 2021 by Moody's Investors Service (MCO), Fitch Ratings and Kroll Bond Rating Agency. Moody's rates the state's GOs Aa3, Fitch rates them AA-minus and KBRA rates them AA.

S&P said the state's overall credit improvement is supported by the executive branch's announcement that it intends to extend statutory financial controls in its next budget proposal. This supports the agency's view that the state remains firmly committed to these provisions.

Gov. Ned Lamont praised the rating action and said it meant the state had made real economic progress over the past several years.

"It is a signal to the businesses and residents that our state is on the right financial path, that we have shown a commitment to putting our fiscal house in order, and we are continuing to make significant progress to address our pension and other postemployment benefit liabilities. S&P recognizes the progress that has been made and that Connecticut is getting its mojo back," Lamond said in a statement.

Also on Tuesday, S&P assigned an AA-minus rating to the state's $400 million of Series 2022E GOs, $250 million of Series 2022F GO social bonds, and $250 million of Series 2022G GO refunding bonds. The bonds constitute the state's full faith and credit and taxing power toward repayment.

The Series E bonds are a new-money issuance to finance various projects. The Series F bonds are a new-money issuance for school construction and program expenses, the state has designated them as social bonds. The Series G bonds will be used to refund some outstanding GOs.

"Connecticut taxpayers should celebrate today's news. This credit rating increase will mean lower costs for critical projects that move our state forward," Lamont said.

Also on Tuesday, S&P raised the rating on debt secured by a special capital reserve fund to AA-minus from A-plus. These include bonds issued by the Connecticut Housing Finance Authority, the Connecticut Health and Educational Facilities Authority and the Connecticut Green Bank as well as other state-backed securities, such as the University of Connecticut's GOs, which are secured by the state's debt service commitment.

Additionally, the rating agency upgraded the state's appropriation-secured debt to A-plus from A and raised obligations secured by the state's moral obligation to A-minus from BBB-plus.

S&P also raised the rating on the state's Series 2016C GOs and the Capital Region Development Authority's Series 2004B bonds, with liquidity support provided by Bank of America (BAC), to AA-minus/A1-plus from A-plus/A1.

Finally, S&P raised Connecticut's special tax obligation transportation fund-secured debt to AA from AA-minus.

"As we develop next year's budget, this credit rating increase sends strong signals for how we should proceed in the future," said Jeffrey Beckham, Secretary of the Office of Policy and Management. "The budget we release in February will include an extension of the bond covenants that S&P stated as a key reason for our upgrade. If we are going to continue the positive progress made under this administration, those bond covenants and associated benefits must be a part of the final budget bill."

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

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