New Jersey local governments may be exposed to more credit risk as they guarantee the debt of other entities, a strategy that led to default in Harrisburg, Pennsylvania, Moody’s Investors Service said.
Local governments that pledged their full faith and credit to guarantee the general-obligation debt of enterprises and other municipalities was 7.9 percent of all Moody’s-rated New Jersey local-government issuance in 2008. In 2011, that figure increased to about 29 percent, Moody’s said in a report today.
Moody’s examined impaired credit in Collingswood, Salem and Hoboken, all with non-investment-grade ratings; and Hudson County, rated Aa3, Moody’s fifth-lowest investment grade. The governments saw their borrowing power fall on soured projects involving residential redevelopment, a privately run hospital, office leases and a soccer stadium.
The report cited Harrisburg as “an extreme example of credit stress driven by a guarantee obligation for a failed enterprise.” The city, which backed $310 million of debt for a failed incinerator project, missed $65 million of guaranteed payments over three years and defaulted on its own general- obligation debt in March.
The local governments act as “backup” security, and in some cases can bypass debt limits, according to the report.
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