Rating Action: Moody's revises Hawaii's outlook to stable, assigns Aa2 to GO Bonds of 2022, Series GK; affirms outstanding ratings

News Release from Moody’s 13 Oct 2022

New York, October 13, 2022 -- Moody's Investors Service has assigned a Aa2 rating to State of Hawaii's $800 million Taxable General Obligation (GO) Bonds of 2022, Series GK. Concurrently, Moody's has affirmed the state's Aa2 issuer rating; the Aa2 rating on approximately $8.2 billion of outstanding GO Bonds; the Aa3 rating on the $11 million Department of Hawaiian Homelands' Certificates of Participation outstanding; the A1 rating on the $23 million Department of Hawaiian Homelands' Revenue Bonds outstanding; and the Aa2 rating on the $510 million highway revenue bonds outstanding. The outlook on all of those bonds have been revised to stable from positive.

RATINGS RATIONALE

The Aa2 issuer rating reflects the state's sound financial position and strong governance, offset by economic concentration in tourism, elevated leverage (combined debt, pension, OPEB and other liabilities) and associated fixed costs. The state's reserves are currently at record levels, benefitting from the strong rebound of the state's tourism industry, the availability of federal pandemic aid and stronger-than-expected revenue performance; this positions the state to better withstand the high inflation period and global economic slowdown. The issuer rating also reflects the state's lagging economic growth and weaker demographic trends in relation to the nation.

The Aa2 rating on the state's GO bonds is equivalent to the issuer rating because of the broad full faith and credit pledge on the bonds.

The Aa3 rating on the Department of Hawaiian Homelands' Certificates of Participation (COPs), one notch below the issuer rating, reflects the limited, subject to appropriation, nature of a lease security; the essentiality of the leased asset; and the state's obligation to fund administrative and operating costs of the department, including lease payments, from its general fund.

The A1 rating on the Hawaiian Homelands' Revenue Bonds, two notches below the issuer rating, reflects the solid coverage of debt service by pledged revenues, the inherent volatility and lessee concentration of these real estate-derived revenues, and the state's long-record of providing payments to the department through the Office of Hawaiian Affairs to make debt service payments.

The Aa2 rating on the highway revenue bonds reflects the strong coverage of debt service by pledged revenues, the diversity of the pledged revenue stream, the state legislature's demonstrated willingness to add new pledged revenues as needed to fund the state's highway program, and limited future borrowing plans. At the same time, pledged revenues are more vulnerable to a downturn in tourism than comparably-rated state highway bonds due to the significance of car rental surcharges as a share of pledged revenues.

RATING OUTLOOK

The revision of the outlook to stable from positive reflects our expectation that given its significant tourism industry, lagging demographic trends, and already high cost of living, Hawaii is vulnerable to high inflation and potentially less favorable economic conditions ahead. Nonetheless, the stable outlook reflects our expectation that through careful fiscal management, the state's financial position will remain healthy and that it will continue to proactively address its social challenges and elevated liabilities over the long-term.

FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATINGS

(Issuer Rating and GO rating)

• -Stronger and more stable trend of economic growth, especially as compared to the US and other states
• -Strengthened socioeconomic profile and demographic trends
• -Steady continuation of efforts to reduce long-term liabilities

(Department of Hawaiian Homelands' bonds' ratings)

• -An upgrade of the state's issuer rating

(Highway revenue bonds' ratings)

• -An upgrade of the state's issuer rating, coupled with maintenance of strong debt service coverage

FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATINGS

(Issuer Rating and GO rating)

• -Additional economic deterioration that leads to material revenue declines, budget imbalance, liquidity pressures, or a narrower reserve position
• -Return to reliance on non-recurring solutions to balance the budget
• -Sustained growth in leverage and fixed costs

(Department of Hawaiian Homelands' bond' ratings)

• -A downgrade of the state's issuer rating

(Highway revenue bonds' ratings)

• -A severe decline in pledged revenues, not offset by new revenue sources
• -Material increase in leverage resulting in significantly lower debt service coverage
• -A downgrade of the state's issuer rating

read … Full News Release