Moody’s Upgrades Louisiana Issuer Rating

Moody’s Investors Service has upgraded Louisiana’s issuer rating to Aa2 from Aa3.

In conjunction with this action, Moody’s upgraded the state’s outstanding general obligation bonds to Aa2 from Aa3 and upgraded to Aa3 from A1 the ratings on the lease appropriation Custodial Receipts, Louisiana Transportation Authority bonds, New Orleans Federal Alliance Project bonds, Louisiana State Capitol Complex Program bonds, I-49 North Project & I-49 South Project (Unclaimed Property Special Revenue) bonds, Hurricane Recovery Program bonds, and the Tollroad Refunding bonds.

Moody’s also upgraded to A1 from A2 the lease appropriation LCTCS Facilities Corporation Project bonds, BRCC Facilities Corporation Project bonds, Millennium Housing L.L.C. bonds, and the South Louisiana Facilities Corporation Project bonds. Moody’s upgraded to Aa3 from A1 the state’s tax-backed State Highway Improvement Revenue bonds. The state’s issuer rating outlook and the outlook for the State Highway Improvement Revenue bonds were revised to stable. Concurrently, Moody’s affirmed the Aa2 and Aa3 ratings on the state’s Gasoline and Fuels Tax bonds. The rating outlook on the Gasoline and Fuels Tax bonds is stable. The action affects approximately $8 billion in debt.

The upgrade to Louisiana’s issuer rating reflects the significant progress the state has made in restoring its financial reserves and liquidity in recent years by structurally aligning revenue and spending, despite a generally declining trend and volatility in gas and oil production, and unfavorable demographic trends.

The Aa2 issuer rating reflects the state’s large and diverse tax base and moderate combined debt and pension burden. The rating also incorporates the state’s vulnerability to the volatility in the energy sector and its exposure to social risks, including slow population growth, low per-capita personal income, and a low labor force participation rate, and its above-average exposure to environmental risk, particularly hurricanes and flooding.

The state’s Aa2 general obligation rating is at the same level as the issuer rating as the state pledges its full faith and credit to the bonds.

The Aa3 ratings on certain appropriation bonds are one notch below the state issuer rating, because of the essentiality of the funded projects to state government and moderate legal security. The remaining lease appropriation transactions are rated A1, a two-notch distinction reflecting the essentiality of projects financed and the greater complexity of transactions that involve nonprofit entities in lease arrangements, exposing the bonds to bankruptcy risk and weakening the legal security.

The Aa3 rating on the State Highway Improvement Revenue bonds is based on strong legal protections for bondholders and a record of stable improving revenue collections of the state’s pledged truck and trailer registration fees.

The Aa2 rating on the Gasoline and Fuels Tax First Lien Revenue bonds is based on strong legal provisions that include constitutional protections of revenues for transportation purposes, no appropriation risk, and healthy current coverage by pledged revenues. The senior lien on pledged revenues is closed.

The Aa3 rating on the Gasoline and Fuels Tax Second Lien Revenue bonds is supported by the same strong legal provisions as the First Lien bonds, offset by greater exposure in the flow of funds to the requirement that a portion of the pledged revenues must first flow through the state’s Bond Security and Redemption Fund. The transportation-related revenues pledged to the First and Second Lien Revenue bonds are tied to the energy-dependent state’s volatile economy and its financial condition.

Factors that could lead to an upgrade of the ratings:

• Long-term growth and diversification of the state economy
• Changes in state, legal and institutional structures to promote greater financial flexibility and allow accumulation of more significant reserves

For general obligation debt:

• Upgrade of the issuer rating

For appropriation-backed debt:

• Upgrade of state issuer rating

For State Highway Improvement Revenue debt:

• Upgrade of state issuer rating combined with material improvement in coverage of debt service by pledged revenue

For Gasoline and Fuels Tax debt:

• Upgrade of state issuer rating combined with increase in coverage of debt service by revenues

Factors that could lead to a downgrade of the ratings:

For issuer rating:

• Failure to balance budgets with preponderance of recurring actions leading to liquidity drain and shrinking budgetary reserves
• Prolonged deterioration of key economic indicators, including population, employment and income

For general obligation debt:

• Downgrade of Louisiana’s issuer rating

For appropriation-backed debt:

• Downgrade of state issuer rating or indications of a weakening commitment to timely legislative debt service appropriations

For State Highway Improvement Revenue debt:

• Deteriorating coverage of debt service by pledged revenue

For Gasoline and Fuels Tax debt:

• Downgrade of state issuer rating or unfavorable revenue trends

Gov. John Bel Edwards issued a statement yesterday about Moody’s upgrading Louisiana’s issuer rating and revising its outlook to stable.

Moody’s most recent upgrade is yet another step in the right direction for Louisiana’s financial outlook. When I came into office, we were facing a huge fiscal cliff and unstable finances. By working together with the Legislature, we’ve been able to turn things around. We now have surpluses instead of deficits, we’re investing again in education and infrastructure and we are no longer relying on one-time money for recurring expenditures. Between the pandemic and natural disasters, nothing we have done over the past several years has been easy, but our commitment to strong financial management is paying dividends for Louisiana.”

In upgrading the rating, Moody’s wrote “The upgrade to Louisiana’s issuer rating reflects the significant progress the state has made restoring its financial reserves and liquidity in recent years by structurally aligning revenue and spending.”