Wednesday, March 25, 1998

Moody’s may
downgrade state debt

The move would force Hawaii
to pay higher interest
on its bonds

By Rob Perez


Moody's Investors Service is considering a ratings downgrade for the state's main debt, a reflection of the anemic local economy and potential fallout from the Asian economic crisis.

Moody's today placed the Aa3 investment -grade rating for the state's $2.8 billion of general obligation bond debt on a watch list because of the likelihood of a ratings change.

If Moody's downgrades the debt, that would increase the state's cost of borrowing because a lower rating -- reflecting a lesser potential ability to repay obligations -- would mean Hawaii would have to offer higher interest rates to attract investors.

This is the first time during the state's economic downturn that Moody's, one of the two main bond -rating agencies in the country, has placed Hawaii debt on the company's watch list.

"We're basically saying we don't like what has happened," and it's time to take a much closer look at the situation, said Raymond Murphy, vice president of Moody's public finance group in New York.

In issuing the review notice, Moody's noted that Hawaii has not shared in the economic boom enjoyed by the rest of the country over the past five years.

While U.S. employment has grown by 3 percent and the jobless rate has fallen to a 24 -year low, Hawaii has suffered a 0.5 percent average annual decline in jobs and its jobless rate rose to 6.4 percent in 1996, the highest level this decade, Moody's said.

"This economic stress has resulted in budgetary operating deficits in four of the last five years," the company said.

The budget deficits, weak economic performance, high levels of debt, unresolved shortfalls expected in future budget years and the adverse effect that weakening Asian economies may have on Hawaii tourism were all cited by Moody's in issuing the notice.

State finance director Earl Anzai said he was concerned by Moody's actions but claimed the company doesn't fully understand Hawaii's fiscal condition.

Anzai is scheduled to fly to New York next week to meet with Moody's officials in hopes of convincing them not to downgrade the rating. He also is scheduled to meet with potential investors while on the mainland. The state has postponed a $640 million bond sale, including $340 million in refinanced debt, from next week until mid-April while it makes its case to Moody's. As part of its review, Moody's said it will assess the state's ability to maintain balanced budgets over the long term. It also will evaluate the state's ability to shoulder additional blows resulting from continuing weakness in Asia.

Murphy said a decision on the possible downgrade should be made within several weeks -- before the May 5 adjournment of the legislative session.

If the Legislature takes action to address Hawaii's economic crunch, that will be considered as Moody's continues its regular analysis of the state's fiscal situation, he said.

"What the Legislature does do will certainly have an impact on what our outlook (for Hawaii) is," Murphy said.

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