New York City downgraded as Moody's warns of longer return to normal

[NEW YORK] The coronavirus pandemic has cost New York City its Aa1 credit rating, the second-highest awarded by Moody's Investors Service.

The city's general obligation bond rating was cut one notch to Aa2 from Aa1, according to a statement from the company. The downgrade impacts US$38.7 billion of general obligation bonds. Moody's also lowered the city's US$4.5 billion of appropriation backed debt by one level to Aa3 from Aa2.

"The downgrade reflects the substantial financial challenges New York City faces caused by the economic response to the coronavirus pandemic and our expectation that New York City is on a longer recovery path than most other major cities," Nicholas Samuels, a lead analyst at Moody's, said in a credit ratings report on Thursday.

Moody's kept its negative outlook on the city's debt, signalling another downgrade is possible. This "reflects ongoing uncertainty about how long the pandemic's economic consequences will impact the city's economy and budget, including the return of office workers, business and leisure travel and real estate markets", Moody's said. "The outlook also reflects our opinion that the city cannot shift to a 'back to normal' economy until a vaccine is widely available."

New York City is planning to sell US$1.1 billion of tax-exempt, fixed-rate general obligation bonds on Oct 7 to fund capital projects and convert some floating-rate debt to fixed, the city said in a news release.

Mayor Bill de Blasio has said the city may be forced to cut 22,000 jobs. It has asked the state for authority to borrow US$5 billion to pay operating expenses over the next two years, but Governor Andrew Cuomo opposes the move.

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While the public health response to the pandemic lowered the city's infection rate, the lasting economic consequences "will likely be among the most severe in the nation and require significant fiscal adjustments", Moody's said. The city faces additional fiscal pressure from potential actions the state of New York may take to balance its own budget and assist the finances of the Metropolitan Transportation Authority, according to the ratings company.

"I am not surprised," said Eric Friedland, director of municipal research at Lord Abbett & Co. He said he doesn't expect multi-notch downgrades for the city given that economic activity is showing signs of recovery, spending cuts are available and New York's largest revenue source is property taxes, which are less volatile in a downturn than sales taxes.

"Home prices and sales in outer boroughs are holding up compared to Manhattan, and the City is able to draw upon a good level of reserves to help achieve balance," he said.

New York City's unemployment rate reached 20.4 per cent in June and was 16.3 per cent in August. Revenue in the city's US$88.2 billion budget is US$7.1 billion lower than projected in January.

The spread between New York City's 10-year general obligation bonds compared to AAA rated debt widened to as much as 0.7 percentage point in May from 0.12 percentage point at the beginning of March, according to data compiled by Bloomberg. The yield premium is currently 0.55 percentage point.

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