LOS ANGELES — Alaska is likely to get a one-notch downgrade from S&P Global Ratings after it closes a massive pension obligation bond deal.
S&P placed the state on Creditwatch with negative implications Friday anticipating the POB deal and subsequent downgrades.
"The CreditWatch action reflects our view that Alaska's credit profile would incrementally weaken following the issuance of the proposed $3.3 billion pension obligation bonds," said S&P analyst Gabriel Petek.
S&P said it anticipates lowering the state's various credit ratings one notch after the POB deal closes, which would bring GO bonds to AA, appropriation-backed bonds to AA-minus, and moral obligation backed debt to A.
Alaska, through its Alaska Pension Obligation Bond Corporation, plans to price between $2.35 billion and $3.33 billion in taxable POBs on Oct. 26 depending on market conditions, according to Moody's Investors Service.
Fitch Ratings and Moody's assigned the pension bonds AA and Aa3 ratings, respectively. Both continue to assign a negative outlook to Alaska.
Moody's Investors Service downgraded the state's bonds to Aa2 from Aa1 in July.
"The large size of the issue relative to Alaska's population and economic base would result in its debt ratios ballooning while absorbing much of the state's potential bonding capacity," S&P analysts wrote.
At the same time, the infusion of POB proceeds would raise the state's combined pension funding ratio to 83% from 67%, S&P wrote.
"If this improved funding ratio materializes and is reflected in updated actuarial valuation reports, our assessment of the state's pension funded ratio could increase to average from below average and partially offset the effect of the increased debt on our view of the state's debt and liability profile," S&P
Moody's analysts said the Aa3 rating for the POB bonds is one notch lower than Alaska's general obligation rating. The one-notch distinction from the GO rating incorporates the risk of non-appropriation, because payment of debt service on the bonds is subject to annual appropriation by the state legislature, Moody's analysts said. Fitch also rates the POBs a notch below the state's AA-plus issuer default rating citing the same argument.
Alaska's economy is largely based on the development and application of its abundant natural resources, the production of crude oil and natural gas deposits, prominent fishing industry, and mining and tourism.
"These narrow revenue sources will continue to reflect the economic volatility tied to the extensive natural resources sector, impeding the development of a more predictable financial performance," Fitch analysts wrote.
