S&P puts Alaska back on CreditWatch negative

The State of Alaska is continuing the process to sell up to $3.3 billion in pension obligation bonds after receiving mixed reviews from the major credit rating agencies.

On Friday, S&P Global Ratings placed the state on CreditWatch with negative implications and rated the state’s appropriation-backed bonds, such as the pension bonds, as AA-.

The agency indicated in a brief that it would likely lower the state’s general obligation credit rating from AA+ to AA if the bonds were sold.

Appropriation-contingent bonds are often rated at least one notch lower than general obligation debt.

“The CreditWatch action reflects our view that Alaska’s credit profile would incrementally weaken following the issuance of the proposed $3.3 billion (in) pension obligation bonds,” S&P analyst Gabriel Petek said in a release.

Also on Friday, Moody’s Investors Service rated the bonds at Aa3, a rating equivalent to AA-. Fitch ratings gave the potential bond sale an AA rating. Fitch and Moody’s did not indicate they would lower the state’s general obligation rating if the bonds are sold.

Revenue Commissioner Randy Hoffbeck described the prospective bond sale as a “trigger” that would just move up the timing of a potential downgrade.

S&P removed Alaska from its CreditWatch list in August after Gov. Bill Walker vetoed nearly $1.3 billion from the state’s operating budget in an effort to reconcile a $3.2 billion budget deficit.

State Revenue officials are looking to sell between $2.3 billion and $3.3 billion in bonds to help fund the state’s $24.5 billion Public Employee and Teachers’ Retirement systems.

The deal could potentially help the state take advantage of low interest rates if investment returns on the bond revenue exceed the interest rate they are sold.

According to Hoffbeck, the state likely won’t sell the bonds if the interest rate on them exceeds 4 percent, while the state’s retirement fund investors aim for 8 percent long-term returns.

Hoffbeck said the agency opinions are slightly better than the state was expecting, so the Revenue Department will go ahead with a three-week worldwide marketing effort to sell the bonds, which are expected to be priced on Oct. 26.

“We actually thought we were going to be AA- across the board, so we actually ended up on the bonds with a little better rating than we thought we were going to end up with,” Hoffbeck said.

“If we can bring in the sale under 4 percent, then we’ll take it all back to the governor and say, ‘Here’s the risk, we’ve got S&P saying they’re going to downgrade us. Here’s the benefits,’ and let the governor give it a thumbs up or a thumbs down.”

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