Hartford attracts distressed loan offer

13 October 2017

An investor has offered the cash-strapped City of Hartford a USD 55m loan, a source close and a source familiar told Debtwire Municipals

 

The investor is looking to raise USD 55m off unencumbered collateral, said the source familiar. The offer came as recently as this week, the source close said. However, the city is not currently seeking any sort of external financing, according to the source close.

 

“There may be people interested in making offers… but additional debt doesn’t accomplish anything for the city,” the source close said.

 

Hartford Mayor Bronin said in a 7 September letter to Governor Dan Malloy (D) that the city could be filing for Chapter 9 in as little as 60 days if Connecticut fails to green-light a budget or additional aid. Bronin reiterated that message in a 25 September call with bondholders.

 

No bankruptcy, yet

 

Hartford has yet to submit a Chapter 9 request to Governor Malloy, according to the source close. In addition to the governor, Connecticut’s legislature would also need to sign off on a Hartford bankruptcy filing.

 

Hartford’s city council would play a role within a Chapter 9 process, but their approval is not necessary to initiate the bankruptcy process, said Councilman John Gale.

 

“From a legal standpoint, I believe the mayor has the power to file for Chapter 9 without city council,” said Gale. “However, whatever restructuring plans are developed within the bankruptcy process will surely need our approval.”

 

Hartford will need approximately USD 40m in state aid to help bridge a projected deficit of USD 50m this fiscal year (FY18), based on a spending plan of USD 629m.

 

Connecticut has yet to approve a budget for the ongoing FY18, which kicked off 1 July, with the House of Representatives most recently refusing to override Malloy’s veto of an approved spending plan.

 

Time is of the essence

 

Greenberg Traurig, which serves as legal counsel to Hartford, warned that the city would run out of liquidity in November if state aid fails to materialize.

 

“We started this fiscal year with about USD 5m in funds, which is not a big cushion,” said Councilman Gale.

 

“Based on the last spreadsheets I've seen, we're in the negative in October,” said Gale. “What keeps us afloat is that we're pooling city and board of education funds, but by December those pooled funds will be insufficient.”

 

Hartford is due to pay roughly USD 20m in tax anticipation notes (TAN) by the end of this month. The city has a little more than USD 700m in debt outstanding, including the TANs.

 

Most of the city’s debt is insured by Assured Guaranty, with an exposure of USD 330m, followed by Build America Mutual (BAM) at USD 106m, Ambac Assurance at USD 45m, and MBIA at USD 27m.

 

Between a rock and a hard place

 

With the largest stake among monoline insurers, Assured has presented a plan to Hartford that would essentially scoop and toss the city’s general obligation (GO) debt in order to avert bankruptcy.

 

“I appreciate Assured's proposal to the city, and I think it's their job to protect their interests,” said Gale. “However, refinancing is kicking the can down the road, and we can't keep doing that.”

 

If pressed for cash, and without access to Chapter 9, the city could potentially consider issuing refunding debt, said the source close. But the city isn’t considering any plans that involve adding debt to capital, the source added.

 

“As to losing market access because of Chapter 9, I would say we've already lost market access,” said Gale. “Hartford has been downgraded multiple times in the past month so that argument doesn't really make sense.”

 

The latest round of downgrades for Hartford came at the end of September, when S&P Global Ratings and Moody’s Investors Service superdowngraded the city multiple notches to ‘CC’ and ‘Caa3’, respectively.

 

"Many people view Chapter 9 as something negative, but I don't necessarily think it is," said Gale. "Bankruptcy provides a space to enact much-needed reforms."

 

"To the extent we can do that, this process can be both challenging and exciting," said Gale. 

 

Creating bankruptcy awareness

 

With the prospect of a Chapter 9 filing looming larger every day, Hartford has begun hosting a series of events to educate the general populace about the process and implications of a bankruptcy.

 

“We've been working hard to educate people about what it means to file for bankruptcy,” said Gale. “I myself have participated in two community forums, and we have upcoming events to further that educational goal.”

 

The city has scheduled two public talks about bankruptcy on 19 October, with panelists such as Kevin Orr, the emergency manager during Detroit’s Chapter 9 process, and James Diossa, the current mayor of Central Falls, Rhode Island, which filed for Chapter 9 in 2011, reported the Hartford Courant.

 

“Many of my colleagues [at city council] have reacted viscerally to the idea of bankruptcy,” said Gale. “But I think as they learn more about the process they will come around.”

 

Calls for comment to spokespeople for the mayor and governor were not returned.

 

A USD 9.8m tranche of Hartford’s 3.75% Series 2015C GO bonds due 2035 last traded in odd lots at a high of 100.1 to yield 3.8% on 11 October, according to Electronic Municipal Market Access. The bonds are insured by Assured.

 

by Javier Balmaceda and Jon Berke