Rating Action: Moody's assigns Aa1 to Honolulu, HI's 2020 GO bonds; outlook negative

Global Credit Research - 14 Jul 2020

New York, July 14, 2020 -- Moody's Investors Service has assigned Aa1 ratings to the City and County of Honolulu, Hawaii's General Obligation Bonds, Series 2020C ($189.3 million), Series 2020D ($54.3 million), Series 2020E (Taxable) ($41.2 million) and Series 2020F (Refunding) ($68.9 million). Moody's has affirmed the Aa1 ratings on Honolulu's $3.7 billion in outstanding general obligation bonds. We also maintain a P-1 rating on Honolulu's commercial paper program. The outlook has been revised to negative from stable.

RATINGS RATIONALE

The Aa1 ratings take into consideration Honolulu's massive tax base that has shown healthy long-term growth, as well as the strength and stability of the city and county's financial profile derived from that tax base. Although the coronavirus pandemic has severely curtailed the tourism activity that is a key driver of the economy, most of Honolulu's revenue is derived from property taxes rates that are incredibly low and reflective of assessments that are 18-24 months in arrears of real market activity, making it substantially less exposed and better positioned to respond to economic declines. Ample liquidity provides the city and county a substantial buffer to manage cash flows if the current economic dislocation from the coronavirus pandemic results in property tax delinquencies. As a result, Honolulu's financial profile will remain solid given a revenue structure that in the short-term is somewhat insulated from the immediate effects of the coronavirus on its tourism-supported economy. Large private and public construction projects and a significant military presence provide some offsetting stability to an economy that has been significantly slowed by the coronavirus, and the city has been the beneficiary of substantial federal aid. Debt is manageable, and the city and county has over the last several years adjusted its financial operations to respond to higher required contribution rates to address relatively high pension and OPEB liabilities.

RATING OUTLOOK

The negative outlook reflects our expectation that severe weakness in air travel will continue to suppress visitor counts to Honolulu, and weak economic conditions both in the US and globally will hurt tourism spending. Although these do not directly impact Honolulu's property tax revenue in the short-term, sustained levels of elevated unemployment will eventually hurt property valuations and property tax collections, and elevated fixed costs from debt, pension and OPEB liabilities will limit Honolulu's ability to make significant expenditure cuts. Shortfalls in general excise taxes and transient accommodations taxes in support of the rail project will remain manageable for the city and county relative to the size of its tax base and existing debt portfolio but add incremental contingent liability risks. Climate risks, particularly those related to sea level rise, are mid-to-long term challenges that state and local leaders are beginning to address.

FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS

- Increased economic diversification and improvement in wealth indices

- Significant improvement in the funding of OPEB and pension liabilities

- Greater certainty regarding rail costs, revenue streams and plans to address their impact on the city and county's finances

FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS

- Sustained economic weakness leading to declines in assessed values and property tax collections

- Material decline in the city and county's financial profile

- Inability to manage substantial fixed costs

- Substantial growth in the city and county's contribution to the rail project

LEGAL SECURITY

The bonds are secured by an unlimited property tax pledge; debt service payments represent a first charge on the city and county's general fund.

USE OF PROCEEDS

The 2020C and 2020D bond proceeds will be used for general capital projects and equipment. The 2020E bond proceeds will pay for capital improvements to the H-Power plant. The 2020F bonds will be used to refund for savings certain outstanding maturities of the 2010A (BABs) bonds.

PROFILE

Coterminous with the island of Oahu, the City and County of Honolulu is the capital city of the State of Hawaii and the economic and political center of the state. Approximately one million people live on the island, constituting nearly 70% of the state's population.

METHODOLOGY

The principal methodology used in these ratings was US Local Government General Obligation Debt published in September 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1191097. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

William Oh Lead Analyst Regional PFG West Moody's Investors Service, Inc. One Front Street Suite 1900 San Francisco 94111 US JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Valentina Gomez Additional Contact Regional PFG Northeast JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653

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