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The Honolulu Advertiser

Posted at 10:35 a.m., Wednesday, October 3, 2001

Hawai'i bonds could face downgrading

Advertiser Staff and News Services

New York — Bonds backed by Hawai'i and Disneyland's home, Anaheim, Calif., may face downgrades because of reduced tourism, Standard & Poor's said today.

Fewer people are traveling since Sept. 11, when hijackers crashed jetliners into the World Trade Center and Pentagon in the worst terrorist strikes in U.S. history. Municipalities that rely on tourism for tax revenue may have less to pay bondholders, the rating company said.

The drop in air travel marks a reversal of fortune for Hawai'i. Standard & Poor's in July raised the state's general obligation bond rating to "AA-" from "A+," citing increased tourism and an economic rebound. Moody's last year also upgraded its assessment of Hawai'i's general obligation bonds, which means the state can pay lower interest rates on the bonds because they are considered less risky for investors.

"The potential impact of steep declines in tourism is large, particularly for a state" dependent on air travel as a source of visitors, Standard & Poor's said in its statement today.

But some said it is still too early to make such assessments.

"We need to get a couple of months more down the road before we really know" how much the state's finances will be hurt by reduced air travel, said Robert MacIntosh, who runs the $18 million Eaton Vance Hawaii Municipals Fund.

As of Sept. 1 the state owed $3.55 billion in outstanding general obligation bonds, which are paid from its general treasury. The state will pay more than $406 million this year in principal and interest.

That does not include $450 million in new construction spending the Legislature authorized this year, or the additional $1 billion that Gov. Ben Cayetano has proposed for construction projects to help offset the economic downturn since Sept. 11.

It also does not include other state borrowing for airport and highway construction activities, which are counted separately.

State legislators have said they will move cautiously on Cayetano's proposal to borrow an extra $1 billion, out of fear the borrowing might push the state debt too high.

Standard & Poor's said Anaheim also is vulnerable to a slowdown at Disneyland because hotel and sales taxes account for about half the city's general fund revenue. The rating company said it might lower the "AA" rating on Anaheim's general obligation bonds.

Moody's Investors Service last week cut Walt Disney Co.'s ratings for the first time in five years, citing concern that attendance at its theme parks would dwindle.

Reduced tourism at the nation's capital also may take a toll on bonds sold by the Washington Convention Center Authority, Standard & Poor's said. The authority's bonds are rated "AAA" based on insurance against default. Without insurance, the rating would be "BBB," according to Standard & Poor's.

Still, some cities and states popular with travelers have enough financial cushion to weather a slump.

"I don't think you should expect every issuer that is close to water" to face a possible downgrade, said Colleen Woodell, a managing director at Standard & Poor's. "Hawai'i and Anaheim are two of the extremes."

Orlando, Fla., where Walt Disney World and other theme parks are based, has "substantial" reserves from diversified taxes, Standard & Poor's said, as does the state of Florida.

Nevada, which along with Las Vegas and Clark County "are heavily dependent on tourism and gaming revenues" — experienced "sharp declines" in visits immediately after the attacks, Standard & Poor's said.

The declines are "gradually being reversed," however, according to the rating company. Standard & Poor's said it had held off putting the Nevada issuers under scrutiny for possible downgrades.