Munis hurt by cities' woes

Andrew Leckey

June 16, 1992|By Andrew Leckey | Andrew Leckey,Tribune Media Services

Riots, floods, earthquakes and economic instability.

In the tumultuous 1990s, each can play a negative role in the credit quality of municipal bonds. Just as creditworthiness of individuals has been put under a magnifying glass by the recession, so are these issues under scrutiny.

The Los Angeles riots, for example, increased concern about the already-clouded fiscal situation of the state of California. The flooding of Chicago's underground tunnel system means debt rating services will continue to monitor for potential liabilities.

Meanwhile, the topsy-turvy status of airlines raises question marks about the ability of airport projects to pay back debt if they rely too much on one carrier.

While many one-time negative surprises don't reflect on long-term viability of debt, in all cases they gain the attention of rating services.

Investors, who directly or through mutual funds own 70 percent of all municipal bonds, want to feel they can count on these debt vehicles.

In rating debt, the Standard & Poor first examines the amount of debt the issuer has and how it's growing. It then turns to the state of the local economy, considering business activity, population growth and income levels. Finally, it looks at financial management of the issuer in terms of how it balances its budget.

"While we're still looking at the Los Angeles situation, we try very hard not to overreact to disasters," said Richard Larkin, managing director of municipal finance for S&P. "Catastrophes don't necessarily result in a rating change, and we look at whether just a segment of the city or state was affected."

Late last year, S&P downgraded the state of California's general obligation bond rating to Double-A from Triple-A, affecting $15 billion of outstanding debt. That downgrade reflected chronic deficit operations and the elimination of budget reserves since the end of 1990. It's too soon to tell whether the riots will further damage that declining debt rating.

Another recent catastrophe, Chicago's underground flood, prompted rating services to quickly confirm their existing ratings of the city's debt, although with some qualifications.

Moody's Investors Service confirmed an A rating for $995 million of Chicago's outstanding general obligation debt. It did, however, recognize that the underground flooding that plagued the city still offers the potential for "tremendous liability costs to the city."

S&P affirmed its A-minus rating for $173 million of Chicago's unenhanced general obligation debt, saying the city had enough "financial flexibility" to maintain its credit quality. It noted that the costs of the flooding would be shared with the federal government and the state of Illinois.

Airport projects are another worry.

Denver International Airport, scheduled to open in October of 1993, was hit hard by the bankruptcy of one of its biggest tenants, Continental Airlines. While Denver officials contend other carriers would fill the void if Continental shut down, S&P downgraded the $1.5 billion in revenue bonds issued by the city to near junk-bond level.

"Airport projects are for big, big bucks and these revenue bonds tend to get medium ratings, which really depend on the demand for the airport in the city," explained Larkin. "In Denver, our concern was about whether Continental would be able to cooperate throughout the life of the project."

Having good contingency plans is crucial in such cases.

"Several credit issues from the Denver International Airport project have been upgraded, then downgraded, then upgraded again," noted McKinnon. "There's a lot of price volatility because they are new and untested issues."

S&P, despite downgrading debt of air carriers AMR Corp., Delta Air Lines Inc., NWA Inc. and USAir Group, recently maintained ratings on all airports.

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