Upgrade-to-Downgrade Ratio Falls Below 1 to 1, Moody's Says

WASHINGTON - Municipal issuers continued to be plagued by downward credit pressure in the first quarter of 2009 as downgrades began to eclipse upgrades in major muni sectors, which face negative outlooks going forwards, Moody's Investors Service said in a report issued yesterday.

The ratio of upgrades to downgrades fell to 0.8 to 1 from 1.1 to 1 in the previous quarter, putting it at its lowest point since the 2003 quarter following the last recession, Moody's said.

Overall economic distress instead of individual issuer-specific problems were to blame for most of the rating revisions, the agency said.

The first three months of 2009 also was the first time that all sectors - including state and local governments, housing, health care, and higher education - received a negative outlook by the agency, noted Moody's analyst and report author Kimberly Lyons.

"What that essentially says is the operating environment for these issuers looks negative for the current year, but it's hard to characterize whether you'll see such a dramatic decline" quarter over quarter in the near future, Lyons said. "We expect some more deterioration."

She added, "It's hard to tell if, at this point, issuers have begun to adjust revenues to meet expenditures."

State and local governments were given downgrades tied to about $62 billion of debt, Lyons said.

A broad slump in revenues and other economy-driven factors "put issuers in a spot" where their unfavorable balance sheets prompted rating actions, said Pamela Federbusch, a senior vice president at Moody's.

In addition, downgrades to bonds issued in California accounted for most of the dollar amount - 85% - of debt that was downgraded in the quarter, Moody's said.

The state's general obligation rating was lowered to A2 from A1 in mid-March, affecting about $56 billion of GO and related debt. Another two downgrades to the state's economic recovery bonds during the first quarter affected about $8.5 billion in par value, the agency said.

The health care and housing sectors bore many rating changes during the quarter as well, the report said. Nearly four times the number of health care issuers were downgraded than were upgraded, and more than six times the number of housing credits were downgraded than were upgraded. Health care issuers faced similar negative factors - including declining patient volumes, increased bad debt expense, and charity care - as in the previous quarter.

State and local governments were also hit hard, with the ratio of upgrades to downgrades falling substantially, to 2.1 upgrades per downgrade from 7.1 the previous quarter.

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