OREANDA-NEWS. S&P Global Ratings has placed its 'AA+' general obligation (GO) rating, 'AA' appropriation rating, and 'A+' moral obligation rating on the state of Alaska's debt on CreditWatch with negative implications.

"The CreditWatch action reflects our view our view that Alaska's credit profile would incrementally weaken following the issuance of the proposed $3.3 billion pension obligation bonds," said S&P Global Ratings credit analyst Gabriel Petek.

We anticipate lowering the state's various credit ratings by one notch pending the sale and close of its proposed POB transaction. Specifically, we expect to revise the state's debt ratings as follows:

GO bonds to 'AA' from 'AA+',Appropriation-backed bonds to 'AA-' from 'AA', andMoral obligation backed debt to 'A' from 'A+'.The large size of the issue relative to Alaska's population and economic base would result in its debt ratios ballooning while absorbing much of the state's potential bonding capacity. Almost across the board, the state's various debt ratios would increase to high from low (not including debt service as a share of expenditures). At the same time, we estimate that the infusion of pension obligation bond (POB) proceeds would raise the state's combined pension funded ratio to 83% from 67%. If this improved funding ratio materializes and is reflected in updated actuarial valuation reports, our assessment of the state's pension funded ratio could increase to average from below average and partially offset the effect of the increased debt on our view of the state's debt and liability profile. Nevertheless, the pension systems' funded status would remain dependent on financial market conditions. As proposed, we understand the state's objective is to lower its future annual actuarial pension contribution requirements. If investment returns exceed the cost of funds on the POBs (estimated at approximately 4%), the reduction in annual pension contributions could exceed the annual debt service on the POBs. Under these conditions, the POBs would generate a net cash flow benefit to the state. Both state pension systems assume an annual 8% rate of return. Assuming the actuarial rate of return holds and if the state issues $3.3 billion in POBs, the state could realize present value cash flow savings of $1.76 billion through 2039. However, the potential savings are sensitive to the performance of the invested assets. If the invested assets averaged 7%, for example, the present value of the projected cash flow savings would fall to $1.08 billion.

Notwithstanding the risk related to the POBs, we continue to view Alaska as having very strong credit quality, though it continues to grapple with large unrestricted general fund operating deficits.

At June 30, 2015, the state had about $810.7 million of GO debt, but about $56.9 million of this is considered self-supporting veterans' mortgage revenue-secured debt, leaving about $753.8 million net tax-supported GO debt. At the end of fiscal 2015, Alaska also had about $274.8 million of annual appropriation-supported debt.