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Moody's cuts Houston's $3-bln debt to Aa3 after oil price drop

(Credit: Aaron M. Sprecher/Bloomberg via Getty Images) Sylvester Turner, mayor of Houston, speaks during an interview in Houston, Texas, U.S., on Tuesday, Jan. 26, 2016. Turner said Houston isn't ready to boost property taxes even as it considers extending repayment of its debt and works to plug its more than $5 billion pension shortfall. Houston Mayor Sylvester Turner Interview
March 17
9:33 AM 2016

Moody's Investors Service has cut Houston's $3 billion of general obligation debt by one level to Aa4. Moody's cited reason for the downgrading is to lower oil prices. The rating cut comes close on the heels of Houston's bonds issue.

Houston is the fourth largest city in the US. Moody's Investors Service has downgraded Houston to Aa3, which is also the fourth highest level of global rating agency. Houston's economy is currently under pressure owing to lower oil prices, pensions obligations and curbs on increasing taxes.

Planned sale of $600-million bonds has been prepared by Houston. The bonds issue is scheduled for this month and Houston is planning to use the proceeds to refinance debt. The latest lower rating could also lead to higher costs as Houston borrows from Municipal bonds, as reported by Bloomberg.

Moody's said in a release "The negative outlook reflects the recent weakness in economic and sales tax performance, fueled by energy companies' reduced investments in personnel and capital as oil prices have remained low."

Prevailing lower prices of oil and natural gas for over a year are taking a toll on energy companies in Houston. Two Houston energy producers seem to be heading towards bankruptcy protection. Linn Energy and Energy XXI are finding it difficult to repay debt and interest in time.  Both the companies already cautioned investors about the possible default, according to Houston Chronicle.

Sylvester Turner, who assumed charge as Mayor of Houston, is taking some measures to control costs and generate new revenues over next two years. 

Turner said in a statement "I am continuing discussions with various stakeholders on a plan to solve the city's outstanding pension obligations. The refinancing will still yield considerable savings. I remain confident that the steps we are taking today will create fiscal stability for the city tomorrow."

Wolf Street further adds that commercial real estate market in Houston is highly leveraged. Without rentals and realty revenues, debt can't be serviced. Oil prices are already hurting Houston and highly paid engineers  are facing retrenchment. The sublease space availability rose by 69 percent to 7.6 million square feet as on December 2015. 

At a time, when 7.9 million square feet of sublease space is available in Houston, new building are poised to hit the market making it further worse in real estate segment. Houston witnessed building boom in 2013 and 2014 while about 7.9 million square feet is scheduled for completion in 2016. In total, about 17million square feet of space is expected to be available in next few years.

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