Moody’s Scolds New York City on Amazon, Then Gives It a Pat

(Bloomberg Opinion) -- Last Friday afternoon, as U.S. financial markets were winding down for the week, Moody’s Investors Service pushed out an upgrade on New York City’s $38 billion of general obligation bonds. Normally this would be a big deal for the $3.8 trillion U.S. municipal-bond market. After all, it’s one of the largest borrowers in an otherwise highly diffuse market comprising villages, towns, local park districts and school systems.

Yet in some ways, this Moody’s upgrade was a surprise. As recently as December, the company’s outlook on New York’s Aa2 rating was stable, generally an indication that analysts are comfortable with its current rank (in this case, the third-highest investment grade). The outlook never moved to positive.  The new Aa1 grade is one step higher than S&P Global Ratings and Fitch Ratings, which kept theirs at AA, the equivalent of Moody’s previous score. 

But perhaps the most jarring detail is just two weeks earlier, Moody’s practically dressed down New York for driving away Amazon.com Inc. and its promise of 25,000 jobs at a new corporate campus in Queens. Here’s a passage from a report originally published on Feb. 15 about Amazon’s decision:

“The announcement is credit negative for New York City and highlights how politics and anti-business sentiment can combine to derail economic development despite competitive strengths. New York City has advantages in an educated workforce and mass transit that Amazon was seeking, and Amazon's investment would have accelerated growth in those areas. High-tech employment will also grow more slowly without the 25,000 new jobs Amazon's arrival was expected to create.”

As far as credit-rating language goes, that’s pretty harsh. Nicholas Samuels, the lead analyst, did go on to say that the city’s economy will be strong, even without Amazon, citing companies like Google and Facebook Inc. that have expanded. Amazon or not, the diversification away from Wall Street appeared to be the driving force behind the upgrade. Here’s the first paragraph explaining it:

“The upgrade to the general obligation rating reflects continued strengthening and diversification of New York City's economy, reducing its reliance on volatile financial services. The city's competitive advantages include a young and highly skilled labor pool, access to higher education and medical centers, strong domestic and international transportation links, and low crime rates. Those fundamentals position New York City for strong future growth, especially in media, medical research, and technology, while maintaining its deep strength in financial services.”

That may all be true, but it’s nevertheless a puzzling timeline. It could be that New York had done enough to earn an upgrade before Amazon’s mid-February decision, and Moody’s decided the loss of HQ2 wasn’t enough to change that. Moody’s cites the growth in technology jobs, noting that the city’s population is “attractive to companies like Amazon, Facebook, Google, and others.” At the end of that same paragraph, it mentions political opposition to Amazon “may make firms that want government incentives think twice about it as a location. However, the trajectory of the fundamentals that attracted Amazon in the first place are unchanged.”

To be sure, a “credit negative” just reflects the directional impact of a distinct event, which often isn’t enough to shift an entire outlook. Joe Mielenhausen, a Moody’s spokesman, told Bloomberg News’s Martin Z. Braun that the firm upgrades issuers from a stable outlook “all the time,” even without some sort of new financial information, like audited financials or a surprise increase in tax revenue. “In this instance, the upgrade was a culmination of various credit positive trends our team has been observing for some time,” he said. It’s mostly semantics, but that sounds deserving of a positive outlook to me.

Mayor Bill de Blasio, predictably, lauded the move, saying that New York’s current rating is the highest ever from Moody’s. “For the last five years, we’ve used the city’s budget to improve the lives of New Yorkers,” he said in a statement. “Moody’s credit rating is validation of what we’ve always known: that you can be both a progressive and a strong fiscal manager.”

Moody’s Scolds New York City on Amazon, Then Gives It a Pat

Investors are already clamoring for the city’s bonds. Yield spreads reached an all-time low last week, fueled by demand for triple tax-exempt debt as a shelter from the new federal limit on state and local tax deductions. In a block trade of at least $5 million on Monday, some New York bonds maturing in 2024 changed hands at a yield just 11 basis points above top-rated munis, the smallest spread in 10 months. That’s welcome news for New York taxpayers as the city prepares to issue about $1 billion of debt this week.

On top of it all, it’s anyone’s guess if the city’s Amazon saga is even over. Governor Andrew Cuomo said he’s had many conversations with the company and hopes they reconsider. The New York Times reported that he’s gone so far as to connect with Jeff Bezos to make a personal pitch over the past two weeks. An open letter that ran as a full-page ad in the newspaper urged a second chance.

Confronted with “anti-business sentiment” and derailed economic development, Moody’s ended up deciding Amazon wasn’t a big loss; New York is strong enough as is. Armed with an even-better credit rating and record-low borrowing costs, it may only get stronger.

It's true that upgrades from a stable outlook have happened before. Moody's pointed to five such examples in 2018: San Francisco;Florida;Chicago Public Schools;Washington, D.C.; and the Great Lakes Water Authority.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Brian Chappatta is a Bloomberg Opinion columnist covering debt markets. He previously covered bonds for Bloomberg News. He is also a CFA charterholder.

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