Fitch downgrades ratings for $1.5B in R.I. debt

Susan A. Baird

10/15/2008

NEW YORK – Fitch Ratings Ltd. has pared its credit ratings for $1.5 billion in bonds issued by the State of Rhode Island and Providence Plantations, citing “continued economic and revenue weakness.” But it also replaced the state’s previous negative ratings watch with a “ratings outlook stable.”
In a move that will boost the state’s borrowing expenses, Fitch shaved one notch from its rating for $1 billion of R.I. general-obligation (GO) bonds, to “AA-” from the previous “AA.” The agency pared its rating for $500 million in appropriation-backed state bonds – including R.I. state lease-participation certificates and R.I. Convention Center Authority convention center and civic center revenue bonds – by the same amount, to “A+” from the previous “AA-.”
“Rhode Island’s recent economic performance has been amongst the weakest of the states,” Fitch analysts wrote in the after-market report. “The state has one of the most stressed real estate markets in the country, fueled by subprime delinquencies, and has lost jobs every month since August 2007.”
The report noted that “revenue underperformance in fiscal 2008 required corrective action over the course of the year, including one-time fund transfers, even though the enacted budget for the year employed a substantial amount of tobacco securitization bond proceeds for operations. Fiscal 2008 ended with general revenues of $3.4 billion, tax revenues essentially flat to fiscal 2007, and an estimated $34 million deficit, largely due to overspending. …
“The budget for fiscal 2009 addressed a large projected deficit and includes substantial personnel and Medicaid program savings, the latter of which are unlikely to be fully realized,” the agency said. “Moreover, the state recently announced that revenues through the first quarter of fiscal 2009 are below estimates by at least $25 million.” (READ MORE)
Moreover, “the state plans to issue about $350 million in appropriation-backed bonds to fund its estimated remaining obligations under the popular historic-structures tax-credit program,” which Fitch said “has reduced revenue by more than $40 million in each of the last three years.”
Still, the agency noted, although “Rhode Island’s debt ratios are above average,” they still are “in the moderate range. Net tax-supported debt of about $2.1 billion equals 5 percent of personal income. Pension funding levels are low.”

Earlier this week, Fitch confirmed its “F1+” rating for $750 million in similar general-obligation revenue-anticipation notes (RANs) issued on behalf of the Commonwealth of Massachusetts.
That debt issue– “consisting of $375 million 2008 series B RANs due April 30, 2009, and $375 million 2008 series C RANs due May 29, 2009” – sold at auction on Oct. 8 and was slated to close yesterday, Fitch said.
“The notes are general obligations to which the commonwealth’s full faith and credit is pledged,” the agency said. “Since the sale of the notes, the commonwealth has disclosed that fiscal year 2009 revenue estimates will be revised downward between $800 million and $1.5 billion. The secretary of administration and finance is expected to announce a final revised revenue figure [late today], and the governor is expected to make corresponding spending cuts and take other measures to offset the revenue revision.
“Prior to this forecast change, projected coverage of note maturities provided a good financial cushion against revenue underperformance,” Fitch noted, adding: “While projected coverage will now be reduced, previous coverage calculations excluded the [Mass.] stabilization fund, which with a balance of $1.9 billion provides a further hedge against revenue underperformance.”
In a separate action by Fitch, the State of Connecticut’s upcoming issue of $250 million in general-obligation bonds – slated for sale next week and maturity on Nov. 1, 2009-2028 – was assigned an “AA” rating. The agency also affirmed its previous “AA” rating on about $12.1 billion in outstanding GO bonds, saying the state’s ratings outlook is stable.
“Connecticut’s diverse and wealthy economy includes important manufacturing, finance and insurance sectors, as well as a growing tourist sector,” Fitch noted. “Although [the state’s] economy is slowing in tandem with the nation’s, weak growth continues.”
Moreover, the ratings agency said, “while debt levels are high, Connecticut ranks first among the states in per capita personal income, at 143 percent of the U.S. level in 2007. Revenues are now weakening, leading to a projected deficit in the current year. [But] the state has responded with spending cuts to date; moreover the state’s budget reserve balance is large, at 8.1 percent of General Fund appropriations.”
Moreover, Fitch said, a proposed “recalibration of tax-supported and water/sewer revenue bond ratings,” if adopted, may result in an upward revision of Connecticut’s GO rating.
Fitch Ratings Ltd. is an international credit-rating agency with headquarters in New York City and London. Additional information, including Fitch’s scores for Rhode Island and other state and municipal bonds, is available at www.FitchRatings.com.