New York City plans to tap the booming U.S. municipal bond market for $ 1.5 billion in new funds next week, even as rating agencies warn it faces the prospect of further downgrade of its debt.
The divergence between historically low financing costs and the increasingly dire state of the city’s finances shows how the actions taken by the US Federal Reserve to keep interest rates down have eased the pressure on the most major metropolis of the country – at least for the moment.
The rating agency Fitch warned this week that the coronavirus epidemic was causing long lasting economic damage in New York. He cut the city’s debt rating on Tuesday a notch to double AA minus and reaffirmed its negative outlook, indicating that another downward revision could be considered.
The move follows a move earlier today by S&P Global, which lowered its outlook for New York to negative from stable.
The deterioration of the financial situation plaguing the US economic center and home to Wall Street has been worse than in other parts of the country, said Amy Laskey, analyst at Fitch. Ms Laskey noted that the city had only recovered 46% of the jobs lost in the crisis, lagging behind the national average, and that New York’s large tourism sector was facing a protracted return.
“This view is informed by the weak rebound to date in employment, real estate transactions, tourism and transit use,” said Laskey. “The very low rates of employee returning to offices and the possibility of a longer-term downward trend in office use could exacerbate current economic pressures on the city’s credit profile.”
The downgrade – for all of New York’s $ 38 billion in general debt – came as congressional negotiations on a new economic stimulus package continued to hang over whether it assistance to states and local governments had to be included. Policymakers have been stuck in a stalemate since critical unemployment benefits expired in July, with Republicans reluctant to offer further aid to states and cities.
Andrew Cuomo, the governor of New York State, is advocating for financial assistance from the federal government. He said the consequences for the state and the families within it “are going to be devastating” if lawmakers fail to agree on a deal that includes aid.
The impact could include layoffs of “several thousand” public servants, “dramatic tax increases” and New York City and the state having to borrow money “just to make ends meet,” Mr. Cuomo at a press conference Wednesday. He added that the MTA, the state-run mass transit system, could on its own be forced to lay off around 7,000 workers and would have to raise fares for trains and buses.
“Why would you want to lay off essential workers now when you’ve just launched this ambitious immunization program, I have no idea,” Cuomo said. “A more heinous coincidence of facts you couldn’t have.”
The city’s unemployment rate remained high, with Fitch estimating the level at 17.5 percent in October including workers who dropped out of the workforce. That’s about 7 percentage points above the median of the 50 largest metropolitan areas in the United States.
S&P Global analyst Nora Wittstruck said the rating agency sees a one in three chance it will need to downgrade New York’s credit rating in the years to come. Service cuts by the MTA could hamper the region’s economic recovery, she said.
However, S&P and Moody’s are still giving New York their third highest possible rating – double-A – and the city plans to borrow $ 1.5 billion through a bond issue next week. The funds will be used to withdraw older and more expensive debt.
Reflecting the lower interest rates and yields in debt markets, investors have increased the value of the city’s debt this year. A $ 355 million bond that matures in 2031 was trading at 124.97 cents on the dollar on Wednesday, just below the year high. That pushed the bond’s yield to 2.55%, according to trading data collected by the City Securities Regulatory Council.
Congressional aid has already helped in part to close budget deficits exacerbated by spending related to coronaviruses. The city received $ 1.45 billion from the Cares Act this year.
Fitch noted that the city also received $ 2.65 billion from the Federal Emergency Management Agency, which will help offset the $ 5 billion in coronavirus-related spending that New York City estimates it has. will have to.
The MTA has also received government assistance. He became one of two issuers to mine the Fed’s $ 500 billion municipal loan facility this year.
The facility, which was set up with the US Treasury Department to support hard-hit state and local governments, will expire at the end of the month.