Moody blues: Bond ratings for city, school slip

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Moody Rating Sytems has downgraded three city-related bonds
Moody Rating Sytems has downgraded city-related bonds

MANCHESTER, NH –  Manchester is having a bout of the Moody blues, after a recent downgrade by rating system Moody’s Investors Service, which recently dropped ratings for the city’s $33.7 million in general obligation debt and the school district’s $73.8 million appropriation-backed school facility revenue bonds.

On May 28 Moody’s announced it had downgraded both the city and school bonds. The city’s rating was downgraded from Aa2 to Aa3, while the school bond rating was lowered, from A1 to Aa3 (see rating explanation below).

Mayor Ted Gatsas acknowledged that the city has work to do to improve its rating, but said the good news is both the city and school bond ratings were deemed “stable.”

“It’s just one rating agency, and while nobody likes to be downgraded, it’s important to recognize that the city maintained a stable outlook,” Gatsas said.  It’s also important to note that the parameters they laid out to increase the city’s rating is exactly what I stated in my budget address. I hope the Aldermen will see the importance of maintaining operating surpluses as we go through the budget process,” Gatsas said

The city’s General Obligation Bonds downgrade reflects a “continued challenging financial operation” as detailed below:

“The downgrade to Aa3 reflects the city’s challenged financial operations, resulting in reduced reserves that will stabilize in the near term, but will be pressured by the local tax cap in the future. The rating also incorporates elevated debt and pension liabilities as well as a sizeable and diverse tax base with average socioeconomic indicators.

The downgrade to A1 on the school facility revenue bonds reflects the one-notch distinction from the GO rating given that the bonds are secured by the Manchester School District’s pledge to make annual payments sufficient to pay debt service on the bonds, subject to annual appropriation by the city. The rating incorporates satisfactory legal provisions, the essential nature of the projects funded, and the low risk of non-appropriation by the city.

Moody’s stable outlook for both city and school bonds reflects the expectation that the financial operations will stabilize over the near term due to the override to the tax cap in fiscal 2015, which will enable the city to balance operations, says Moody – which will also limit the city’s ability to build reserves and liquidity.

Moody would look for the following to improve the city’s bonds ratings:

  • Trend of annual operating surpluses
  • Increase in available fund balance
  • Trend of self-supporting operations in the recreation fund

Bond proceeds will be used to finance various town capital projects, golf course renovation and school projects.

On Monday Ward 1 Alderman Joyce Craig, a Democrat who has announced her candidacy for mayor, took the opportunity to release a statement Monday, saying she has concerns about the report.

“I am deeply concerned that once again our City’s General Obligation and school revenue bonds have been downgraded,” wrote Craig, who said this is not the first time the city has been downgraded on Gatsas’ watch.

“We must  change course and make Manchester a city that attracts families and businesses by improving our schools, fixing our roads and keeping our neighborhoods safe,” wrote Craig.

How to interpret Moody’s ratings system

Aaa– assets judged to be of the highest credit quality.
Aa – assets judged to be of high credit quality.
A – assets considered upper-medium credit quality.
Baa – assets considered medium credit quality.
Ba – assets judged to have speculative elements.
B –assets considered to be speculative.
Caa – assets judged to be of poor standing.
Ca – assets that are highly speculative and that are likely in, or very near, default, with some prospect of recovery of principal and interest.
C – generally hold assets that are in default, with little prospect for recovery of principal or interest.

Note: Moody’s appends numerical modifiers 1, 2, and 3 to each generic rating classification from Aa-PD through Caa-PD (e.g., Aa1-PD). The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of that generic rating category

 Editor’s note: A prior version of this story included information on the MHT airport rating, which will be reposted as a separate story.

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About Carol Robidoux 5198 Articles
Journalist and editor of ManchesterInkLink.com, a hyperlocal news and information site for Manchester, NH.
  • Ed Staub

    Yes, Mayor Gatsas, this is just one downgrade – after four more in 2014. Moody’s message, while a bit delphic, was probably clear to everyone but you – if we continue to drain every reserve but the couch cushions, and continue to aggressively bond in favor of expensing, expect more downgrades. Since bond expenses are not under the tax cap, there’s pressure to capitalize, and a lot of the “saved” money just goes to the banks – because of both the increased basis and because of the rating downgrades that happen because we’re scrounging. As overall interest rates increase in the next few years, the penalty for having lower-quality credit will increase – right now it’s relatively small.