Bloomberg News

N.J. Governments Face Risk on ‘Backup’ Debt, Moody’s Says

May 02, 2012

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.

To contact the reporters on this story: Elise Young in Trenton, New Jersey, at eyoung30@bloomberg.net; Greg Chang in San Francisco at gchang1@bloomberg.net.

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net


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