New York received its latest rating agency hit Tuesday when S&P Global Ratings revised its outlook to negative from stable on the city’s general obligation bonds.
S&P cited financial variables related to the spike in COVID-19 cases. It affirmed its AA long-term rating on the city's GO debt.
According to analyst Nora Wittstruck, the new outlook reflects a one-third chance of a downgrade within two years.
The new negative outlook also applies to the city's associated appropriation-backed bonds, said S&P.
“The negative outlook reflects our opinion of uncertainties,” Wittstruck said.
They include an uptick in the virus transmission rate that could negatively affect the city's financial forecast; the trajectory for global tourism trends and additional federal stimulus funding for state and local governments; service reductions at the state-run Metropolitan Transportation Authority that could affect the region’s economic recovery; and weakness in property tax values that could surface in 2023.
“It the short-term, the change in outlook seems to reflect S&P’s view that the recent rise in cases will continue, thus damaging the financial projections of the city and outweighs having an effective vaccine to bring New York back to a more normal economic state,” said Howard Cure, director of municipal bond research for Evercore Wealth Management.
“Not much weight is given to the potential for direct federal aid currently being negotiated,” Cure said. “Tourism and the impact from declining MTA services are also weighted heavily.
“In the medium term, I am more concerned about current trends becoming more entrenched such as an increase in working from home and what that means for office vacancy rates, demand for housing and its impact on the property tax base.”
Nicole Gelinas, a senior fellow with the Manhattan Institute for Policy Research, said Mayor Bill de Blasio’s administration should look within.
“It's a stark reminder that Mayor de Blasio still hasn't put forth any credible budget-savings ideas,” she said. “His ‘savings’ only push labor costs into next year, and he's actually bound the next mayor to new no-layoffs pledges, when he should be asking unions for more flexibility, not less.
“At this point, though, the real question is why the Cuomo-controlled state Financial Control Board isn't asking for a control period so that the state can control any new commitments the city makes.”
Both Gov. Andrew Cuomo and de Blasio have warned more pandemic restrictions could come within days. Measures could include renewed shutdowns of indoor dining and non-essential businesses such as gyms.
“No one’s happy about it, but this health situation has to be addressed,” de Blasio told reporters Tuesday. The city’s seven-day rolling average for positive coronavirus testing is 4.94%, just under the city’s 5% threshold for determining the virus has entered a more serious phase.
S&P assigned its AA long-term rating to the city's roughly $1.5 billion fiscal 2021 taxable GO bonds consisting of Series D and E, amounts to be determined at final pricing.
After this transaction, the city will have about $37 billion of GO debt outstanding.
According to data on the Municipal Securities Rulemaking Board's EMMA website, a block of Series 2021C general obligation bonds maturing in 2037 that originally priced at 114.358 cents on the dollar and a 2.35% yield sold to a customer Tuesday at a price of 120.569 cents and a 1.69% yield.
S&P also affirmed its AA-minus underlying rating of the city's appropriation debt, excluding the Hudson Yards Infrastructure Corp.’s second indenture bonds, which it rates A-plus.
S&P affirmed its A-plus underlying rating on the city's moral obligation debt outstanding, and affirmed its ratings on various issuances where the short-term ratings are based on the liquidity support provided by various financial institutions, and where the long-term ratings are based on joint support.
On Oct. 1, Moody’s Investors Service downgraded the city’s general obligation bonds to Aa2 from Aa1, while also downgrading the state government and some city appropriation-backed debt, including Hudson Yards. Fitch rates the city's GOs AA.
De Blasio said the pending arrival of vaccines in the city as soon as next week is cause for optimism.
“The end is in sight,” the mayor said, while acknowledging challenges over the next two months. “This is the last big battle before us. Then the vaccine will do its work.”
De Blasio has also talked with Janet Yellen, President-elect Biden’s choice as treasury secretary, about a coronavirus rescue package. Yellen, a former Federal Reserve chair, is a Brooklyn native.
“I’m quite satisfied the by the focus of the Biden administration on stimulus to cities,” he said.
