Economic & Market Commentary

10.30.2017

Hartford’s Fiscal Distress

As we approach the last few months of 2017, the City of Hartford finds itself facing a potential liquidity shortfall that could result in a default as soon as November.  Last week, positive news that bond insurers were willing to support a debt refinancing was overshadowed by Governor Malloy’s veto of the state’s budget, leaving Hartford’s solvency in limbo.  Below we provide a brief overview of Hartford’s current predicament, recent developments, and the potential impact Hartford’s distress could have on the State of Connecticut and other local governments.

As expenditures far exceed revenues, Hartford faces a $50 million shortfall in the current budget.  That gap is projected to reach $83 million by 2023.

Recent Developments

On September 25th, bond insurers Assured Guaranty and Build America Mutual, which wrap nearly 80% of Hartford’s debt, announced that they were willing to support a debt refinancing that would provide the City with lower costs for 15 years. If completed as proposed, the debt refinancing provides breathing room for Hartford, but it does not entirely solve the City’s fundamental challenges. To set Hartford on a path of sustainable operations, the City will most likely require increased state aid and labor concessions, in addition to the debt restructuring.

Impact on Connecticut

If Hartford faces a serious liquidity crunch in the next few months, particularly if the State’s budget impasse continues, the market could penalize the State of Connecticut with potentially higher borrowing costs.  However, similar events over the last few years (Detroit, Michigan; Harrisburg, Pennsylvania; Atlantic City, New Jersey) provide examples of stressed local governments that ultimately fail to drive significant credit deterioration at the state level. In the event that Hartford experiences a serious credit event, we believe the largest impact will be felt by other challenged local governments in Connecticut.  This “contagion risk” reinforces our preference for local governments that benefit from strong tax bases, above average socioeconomics, robust financial reserves, and reliance on diverse revenue sources.

 

This commentary reflects the opinions of Appleton Partners based on information that we believe to be reliable. It is intended for informational purposes only, and not to suggest any specific performance or results, nor should it be considered investment, financial, tax or other professional advice. It is not an offer or solicitation.  Views regarding the economy, securities markets or other specialized areas, like all predictors of future events, cannot be guaranteed to be accurate and may result in economic loss to the investor.  While the Adviser believes the outside data sources cited to be credible, it has not independently verified the correctness of any of their inputs or calculations and, therefore, does not warranty the accuracy of any third-party sources or information.  Specific securities identified and described may or may not be held in portfolios managed by the Adviser and do not represent all of the securities purchased, sold, or recommended for advisory clients.  The reader should not assume that investments in the securities identified and discussed are, were or will be profitable.  Any securities identified were selected for illustrative purposes only, as a vehicle for demonstrating investment analysis and decision making.
"One of the unexpected challenges of managing fixed income portfolios is how much of the capital markets have an equity bias. From regulatory guidance to risk measurement conventions, much of the framework of the markets we trade in appears to have been written primarily with equities in mind..."
“This summer we started suggesting investors consider rethinking their bond portfolio duration. After abrupt selling pressure subsequently pushed longer yields up another 70 bps at the end of Q3 and into early October, more support for our view appears to have developed. If the argument was strong then, it is even more compelling now, with bond yields higher than they have been in nearly 20 years.”