The long road back from the ratings dungeon began yesterday for Philadelphia, when Fitch Investors Service gave the city its first upgrade in 17 years.
Fitch moved its assessment to BB from B, leaving the city in the junk category. But the rating agency also assigned a BBB-plus to the Pennsylvania Intergovernmental Cooperation Authority, the city's new oversight board.
A BBB-plus is on the low end of the investment-grade scale, but it will be strong enough to attract insurance for an upcoming bond sale, market analysts predicted.
"Philadelphia is taking its first steps toward resumption of fiscal normalcy," Fitch said in announcing its action. "With the creation and operation of PICA, its interaction with the city, and its bonding of Philadelphia's deficit, imminent risk of default is no longer present."
Colleen Woodell, a senior vice president at Fitch, said the biggest wild card for the city remains its unions, which are balking at many of the proposed concessions Mayor Edward G. Rendell is counting on in his five-year plan to balance the city's budget.
"Any time you have to rebuild an organization, which is what the city is doing, you need your staff on board," Ms. Woodell said. "The unions have to be willing to realize there's value in the five-year plan, and if need be, make sacrifices."
David Cohen, Mayor Rendell's chief of staff, agreed that upcoming collective bargaining sessions with the unions will be key to the city's long-term fiscal recovery. But he said yesterday's rating upgrade is "an acknowledgment of some of the tough things that the city has done and a tentative vote of confidence" in the new level of cooperation among elected officials in Philadelphia.
"It bodes well for the city's ultimate access to the credit markets," Mr. Cohen said.
Philadelphia's oversight board plans to price a $474 million bond sale the week of June 1, which will be used to pay off the city's accumulated deficits and fund capital projects next year. The city has been shut out of the credit markets since late 1990, when growing deficits and political paralysis resulted in downgrades into the non-investment grade range.
Bernard Anderson, chairman of the oversight board, said he is encouraged by the board's new rating because it will help officials selling the upcoming deal "make the case that these bonds are a worthy investment."
Mr. Anderson said the authority's bonds have several strong points, including a high debt service coverage of 2.6% and a segregated tax backing the loan.
He said the fact that the rating did not make it into the A range reflects a "lingering residue" of managerial problems that still must be solved. In addition, the market's negative sentiment toward any credit linked to Philadelphia also hurt the oversight board, according to Mr. Anderson.
"If the name of any other municipality than Philadelphia was on these bonds, we would have been rated even higher," he said.
But Ms. Woodell said there is no way to separate the two credits. "Philadelphia and PICA are intimately related, but security for their respective bonds is separate, as is the credit quality of each entity's debt," she said in her rating announcement.
The last time Philadelphia officials were awarded an upgrade was in 1975, when both Moody's Investors Service and Standard & Poor's Corp. moved their assessments to single A from the upper B range. Since then, however, the ratings have gone steadily downhill.
The slide hit bottom in September 1990, when the city was unable to sell its annual short-term notes and had to resort to high-priced loans from local banks to avert insolvency.
Moody's rating dropped to B, and Standard & Poor's fell even further, to CCC. Both agencies are expected late this week or early next week to announce the results of a fresh assessment of the city's credit, in conjunction with their new rating for the oversight board.
Fitch has only rated the city since June 1990, when it assigned Philadelphia a BBB. The rating fell to B three months later during the city's note crisis and remained there until yesterday.