Standard & Poor's last week cut the ratings on five of the six rated German Landesbanks, some of which provide letters of credit in the municipal market. The agency cited business model and credit concerns for the downgrades.
Bayerische Landesbank had its long-term rating downgraded to BBB-plus from A and its short-term rating lowered to A-2 from A-1; Landesbank Baden-Wurttemberg had its long-term rating cut to A-minus from A-plus and its short-term rating dropped to A-2 from A-1; and Landesbank Hessen-Thueringen retained its A long-term rating and its A-1 short-term rating but was given a negative outlook; HSH Nordbank AG had its long-term rating downgraded to BBB-plus from A and the short-term rating was downgraded to A-2 from A-1; WestLB AG had its long-term rating downgraded to BBB-plus from A-minus and its short-term rating remains at A-2.
The downgrades caused some variable-rate demand note holders to tender their holdings back to the banks, according to Matt Fabian of Municipal Market Advisors.
"Last week, although many participants were encouraged by the government's stress-test results (which do not appear to threaten the tested banks with downgrades), which helped the Libor and SIFMA seven-day, sweeping Standard & Poor's downgrades of the German land banks triggered large-scale puts of affected VRDNs by the tax-exempt money funds," Fabian wrote in his weekly comment. "Not only did this create several billion dollars of new bank bonds, but it likely has also ended those institutions' noted bids to reopen new risk-underwriting operations."
Landesbank Baden-Wurttemberg ranked eighth as an LOC provider last year, Landesbank Hessen-Thueringen ranked 19th, and Bayerische Landesbank ranked 29th. The others did not provide letters of credit last year.
The Metropolitan Washington Airports Authority earlier this year issued $163 million of variable-rate airport system revenue obligations with a standby bond purchase agreement from Landesbank Baden-Wurttemberg.
Some holders had tendered back the obligations, but after speaking with remarketing agent Morgan Stanley, the authority believes it will be able to place those bonds, said MWAA chief financial officer Lynn Hampton.
The downgrades represent only the most recent wave of credit hits to liquidity facility providers that have caused trouble for issuers.
"This is the kind of thing you're hearing from a lot of government issuers," Hampton said. "It's a reason they're talking to Barney Frank about liquidity support." Frank is the chairman of the House Financial Services Committee.
