However, Moody's introduced a note of caution through a new sub-rating system it introduced in January and now rates Hawaii bonds Aa3. The previous rating was Aa.

Moody's analyst Nikolai Sklaroff in San Francisco said today that Aa3 is still high but it puts Hawaii at the low end of the high-grade category.

"It's still a high-grade rating, but we've also noted that we have some important concerns about the state," Sklaroff said.

He said Moody's is "comfortable" with the way the state is handling its finances.

Bond ratings by the big services such as Moody's and Standard & Poor's affect how much interest the bond issuer will have to pay in order to sell them. A lower rating usually means higher interest.

S&P on Friday lowered Hawaii's general obligation bonds two steps in its rating structure, dropping to an A-plus from AA. S&P said the downgrade reflects Hawaii's rising debt, deteriorating financial performance and reduced revenue expectations.

Moody's and S&P have both also expressed concerns about the unresolved problem of Native Hawaiian demands on revenues from ceded lands, including a demand for a share of the state's income from duty free stores.

But Moody's apparently is not as pessimistic as S&P.

Sklaroff said Moody's had discussions with Hawaii officials before deciding the rating.

"We spent time not only with (Budget Director Earl) Anzai, but also with the governor and with Paul Brewbaker," head of the Council on Revenues, he said. "Much of our comfort in this rating category derives from the fact that we have gotten comfortable that the state has a history of maintaining sound finances."

Moody's said the state has taken difficult budget steps to maintain its sound financial history. Tax-revenue recovery is continuing but revenue growth is slower than anticipated, Moody's said.

S&P said its downgrade of Hawaii's outstanding debt of $2.5 billion, which also applies to the upcoming bond issue, is a result of the state's rising debt with substantial additional debt arising in the next budget biennium.

However, S&P also removed Hawaii's existing debt from its "credit watch" category.

Hawaii's bond sale is the week's largest tax-exempt issue, Bloomberg News reports.