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City slightly up on Fitch's financial scorecard

February 11, 2011

WOONSOCKET – Although it left unchanged the city's BBB- bond rating, Fitch Ratings yesterday upgraded the city's long-term fiscal outlook from negative to stable, a move officials hailed as another sign that the city's financial health is slowly but steadily improving.
Moody's Investors Service also issued a status update yesterday in which it changed neither the bond rating of Ba1 nor the stable outlook it had applied to the city during its last analysis, about two months ago. But city officials say Moody's more neutral assessment is still a positive sign because it means the city's financial position is no longer deteriorating.
“All of our efforts to stabilize our finances through our deficit funding bond and prudent management practices have been recognized by the rating agencies,” said Mayor Leo T. Fontaine. “The fact that we retained a stable rating with them, that's very positive for us.”
The New York-based rating agencies took another look at the creditworthiness of the city as it prepares to sell $11.5 million in bonds to erase an accumulated deficit years in the making – about 75 percent of it on the school department side of the ledger.
It's been said so often in the last few months that it's practically taken as a given – the city's bond rating is at junk status – but the rating agencies are actually split on that. Fitch defines its BBB- rating as one notch above investment grade, while Moody's Ba1 is a notch below – what's known in the money markets as junk.
But it's close enough on either scorecard to raise concerns about the city's ability to market the bonds, which are scheduled to be sold on March 8, according to Finance Director Thomas Bruce.
However, now that both of the major rating agencies are on the same page with regard to the city's long-term financial outlook, it's believed the city will have few problems finding investors, according to the finance director.
“In this economy the city still runs a risk of not finding the institutional investors it needs to buy the bonds,” said Bruce. “But with both of the rating agencies bringing us to stable, we're confident we'll find those prospective buyers.”
The General Assembly passed a special law last year giving the city the the authority to borrow money to plug a budget deficit, a maneuver that would have otherwise been illegal. Even with the enabling legislation in place, the city has been unable to take a single procedural step on the path toward the bond sale without the oversight of State Auditor General Dennis Hoyle and Director of Administration and Revenue Rosemary Booth Gallogly.
The latest tweak in the five-year deficit payoff plan came on Monday, when the City Council approved Fontaine's request to divert $1.5 million of the proceeds to a receivables account in the school department. The city has apparently owed the city some $3.5 million for years, and the partial satisfaction of the debt will help strengthen the city's overall financial standing, according to Fontaine.
The bonds will be issued by the city on March 1, at which point payback interest rates and investor yields will be set in stone, but the bonds won't go on the market until a week later, according to Bruce.
A preliminary analysis indicates that whoever buys the notes will earn a premium of roughly 5.8 percent when they mature, said Bruce. The city is expected to pay interest rates that are slightly higher, about 6 percent, but the exact figures will be shaped by the arcane forces of supply and demand in the bond markets on the day of the sale.

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