Tags: S&P | Ratings | Municipal | Bonds

S&P Cuts AAA Ratings on Thousands of Municipal Bonds After U.S. Downgrade

Tuesday, 09 Aug 2011 07:11 AM

 

Share:
  Comment  |
   Contact Us  |
  Print  
|  A   A  
  Copy Shortlink
Standard & Poor’s lowered the AAA ratings of thousands of municipal bonds tied to the federal government, including housing securities and debt backed by leases, following its Aug. 5 downgrade of the U.S.

The rating company assigned AA+ scores to securities in the $2.9 trillion municipal bond market including school- construction bonds in Irving, Texas; debt backed by a federal lease in Miami; and a bond series for multifamily housing in Oceanside, California. Olayinka Fadahunsi, an S&P spokesman, said he couldn’t provide a dollar figure on the affected debt.

S&P also cut ratings on securities backed by Fannie Mae and Freddie Mac, prerefunded issues and munis repaid by using federal assets, also known as defeased or escrow bonds. No state general-obligation ratings were affected and the company said some may remain unchanged.

“It’s expected, but nobody is happy about it,” Bud Byrnes, chief executive officer of Encino, California-based RH Investment Corp., said in a telephone interview. “No one that I know thinks it was justified to cut the U.S. bonds to AA+. Once that happened, you knew that any prerefunded bonds or escrowed bonds would be downgraded too. It’s a domino effect.”

Byrnes said funds required to invest in AAA bonds would be most affected by the downgrades and may be forced to liquidate some holdings. “They will have a hard time replacing that yield,” he said.

‘Logical and Coherent’

Chris Mier, a managing director at Loop Capital Markets LLC in Chicago who follows the municipal bond market, said the downgrades made sense, given the federal rating cut.

“In order to keep the system logical and coherent, there are going to be a lot of downgrades,” Mier said in a conference call with reporters and clients.

Matt Fabian, a managing director of Concord, Massachusetts- based Municipal Market Advisors, a financial research company, said in a telephone interview that he expected “hundreds and hundreds of municipal downgrades,” which may hurt investor confidence.

“Treasuries may be able to shake off a real impact from the downgrade,” he said. “Munis, I’m less sure about.”

S&P cited politics in negotiations to increase the debt ceiling and said lawmakers failed to reduce spending enough.

‘Least Disruptive’

The company said on July 21 that a U.S. downgrade based on a failure to come up with a “realistic and credible” plan to reduce the budget deficit would be the “least disruptive” scenario for municipal ratings. That’s because it would mean Congress avoided making significant cuts to the funding of municipal credits not directly linked to the federal government, S&P said.

Top-rated state and local governments wouldn’t automatically lose their top scores, the company said. It rates the general-obligation debt of nine states AAA. The country’s “decentralized governmental structure” calls for an independent review of state and local government credits, 3.9 percent of which have AAA ratings, S&P said in a report.

State and municipal governments that depend less on the national government for revenue and that manage their own books well enough to weather declines in federal funding may retain AAA ratings, S&P said. The company didn’t name such states or municipal governments in the report.

Issuance Slows

Municipal issuance has fallen amid the U.S. debt-ceiling impasse. The slump and signs of a slowing economy helped drive tax-exempt yields to the lowest this year. Scheduled debt sales total about $2.8 billion this week, the slowest August week since 2003, according to data compiled by Bloomberg.

For the municipal market, “the key is supply and demand,” more than ratings downgrades, said Ed Reinoso, chief executive officer of Castleton Partners in New York, which manages about $250 million for individuals.

The S&P action itself “was almost cosmetic,” he said in a telephone interview. “It doesn’t seem to have much impact.”

Yields on top-rated 10-year tax-exempt debt fell to 2.39 percent, the lowest since October, according to a Bloomberg Valuation index.

S&P, in lowering the U.S. from AAA on Aug. 5, cited the nation’s political process and said lawmakers failed to reduce spending enough in their deal to raise the debt ceiling. Moody’s Investors Service and Fitch Ratings affirmed their top ratings on Aug. 2, the day President Barack Obama signed the bill raising the debt ceiling and avoiding a default.

Similar to Moody’s

Any state and local government downgrades from S&P may be similar to potential rating cuts Moody’s mapped out last month, DeGroot said in his report. Moody’s on July 13 said a possible U.S. downgrade would affect 7,000 municipal credits totaling $130 billion that are directly linked to U.S. credit.

Moody’s also said it would review indirectly linked debt and last month said it may downgrade five of the 15 states it ranks Aaa because of their vulnerability to cuts in federal spending. The company wound up reaffirming those top ratings last week, assigning a negative outlook.

Officials in Maryland and Virginia, two states with economies tightly bound to the federal government, said they hadn’t heard from S&P since the U.S. downgrade and didn’t think any moves were imminent.

Patti Konrad, the director of debt management for Maryland, said it’s unclear what risks any federal budget cuts would deal to her state’s economy.

“I would think S&P would want to take some time,” she said. “We haven’t heard anything from them.”

Ric Brown, Virginia’s finance secretary, said his office hasn’t spoken to S&P in the wake of the U.S. credit rating cut. He said he anticipates that any move affecting the state would be based on how federal budget cuts would ripple through the economy, rather than any automatic triggers.

“It’s probably going to take a little bit of a while until they know specifically what’s on the table to assess that,” he said.

© Copyright 2014 Bloomberg News. All rights reserved.

Share:
  Comment  |
   Contact Us  |
  Print  
  Copy Shortlink
Around the Web

Join the Newsmax Community
Please review Community Guidelines before posting a comment.
>> Register to share your comments with the community.
>> Login if you are already a member.
blog comments powered by Disqus
 
Email:
Country
Zip Code:
Privacy: We never share your email.
 

You May Also Like
Around the Web

Most Commented

Newsmax, Moneynews, and Independent. American. are registered trademarks of Newsmax Media, Inc. Newsmax TV, NewsmaxWorld, NewsmaxHealth, are trademarks of Newsmax Media, Inc.

MONEYNEWS.COM
© Newsmax Media, Inc.
All Rights Reserved