Hawaii rating outlook lowered to stable by Moody’s ahead of bond sale

Bonds

The outlook on Hawaii’s Aa2 rating was lowered to stable from positive by Moody’s Investors Service ahead of an $800 million taxable general obligation bond deal.

The outlook revision “reflects our expectation that given its significant tourism industry, lagging demographic trends, and already high cost of living, Hawaii is vulnerable to high inflation and potentially less favorable economic conditions ahead,” Moody’s analysts Xing Chen Zhu and Nicholas Samuels wrote.

It also reflects “our expectation that through careful fiscal management, the state’s financial position will remain healthy and that it will continue to proactively address its social challenges and elevated liabilities over the long-term.”

Hawaii holds an AA rating from Fitch Ratings and an AA-plus rating from S&P Global Ratings. Both assign stable outlooks.

Hawaii is vulnerable to high inflation and potentially less favorable economic conditions ahead, Moody’s analysts said in lowering the state’s rating outlook.

Bloomberg News

The state expects to take indications of interest for the bonds on Tuesday and hold a formal order period on Wednesday, according to a document posted on the state’s debt management website.

The syndicate selling the bonds will be led by Morgan Stanley as the bookrunning senior manager, BofA Securities and Citigroup as co-senior managers, and Jefferies and RBC Capital Markets as co-managers, according to the document.

Moody’s affirmed the Aa2 issuer rating and Aa2 rating on $8.2 billion of outstanding GO bonds, the Aa3 rating on $11 million Department of Hawaiian Homelands’ Certificates of Participation; the A1 rating on $23 million Department of Hawaiian Homelands’ Revenue Bonds; and the Aa2 rating on $510 million of highway revenue bonds.

The outlook on all of those bonds was revised to stable from positive in a ratings report released Thursday.

The Aa2 issuer rating “reflects the state’s sound financial position and strong governance, offset by economic concentration in tourism, elevated leverage (combined debt, pension, OPEB and other liabilities) and associated fixed costs,” Moody’s analysts wrote.

The state enacted pension reforms in 2017, and announced in a March report that it has reduced the time to pay down unfunded pension liabilities to 24 years from the previously anticipated 26 years.

“This result is due to gains on the investments of the ERS more than offsetting the liability losses,” according to the state’s actuarial valuation for the year ended June 30, 2021. “Because this period is less than 30 years, the minimum objectives set in State statute are currently being realized.”

The unfunded liability also decreased to $14.229 billion for 2021, from $14.607 billion in 2020, according to the report.

The state’s reserves are currently at record levels, Moody’s analysts said, benefitting from the strong rebound of the state’s tourism industry, the availability of federal pandemic aid and stronger-than-expected revenue performance. These strengths position the state to better withstand the high inflation period and global economic slowdown, according to Moody’s.

Moody’s issuer rating also reflects the state’s lagging economic growth and weaker demographic trends in relation to the nation, according to analysts.

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