The three principle rating agencies reported increased volatility and a substantial number of municipal issuer downgrades last year. Yet in their respective reviews of 2009, Moody’s Investors Service, Fitch Ratings, and Standard & Poor’s each implied that while strains will certainly continue into the next year or two, municipalities should be able to withstand the financial pressure.
For Moody’s, the ratio of municipal upgrades to downgrades “weakened considerably” in the year, resulting in the lowest annual ratio of upgrades to downgrades in more than two decades. The ratio declined to 0.7 to one in 2009 from 2.4 to one in 2008.
Fitch downgraded 233 credits last year compared with 209 upgrades. The most recent data is also more volatile: 70 credits were downgraded in the final quarter and 60 credits were upgraded, compared with 33 downgrades and 38 upgrades in the fourth quarter of 2008.
For Standard & Poor’s it is difficult to compare the trend line with previous years because, as the agency noted, criteria changes have generally pushed municipal ratings higher, particularly for smaller and geographically isolated issuers. As a result, positive rating actions actually outnumbered downgrades by a factor of six to one in the year. Despite those numbers, the tone of the report was not positive.
“We think the immediate consequences of the recession were visible in a 287% increase in the number of downgrades in 2009 to 368, from 128 a year earlier,” Standard & Poor’s said. It added that “the overall favorable ratio trend clouds the fact that not all sectors are performing equally well, nor are all rating changes attributable to the same credit factors.”
In the revenue enterprise sector, which includes health care, higher education, not-for-profit, housing, and infrastructure, housing accounted for 57% of Moody’s rating revisions in the year — in the final quarter, 32 housing credits were downgraded and only one was upgraded. By dollar amount, housing actions were 38% of the 2009 revisions, while health care was 37%, higher education was 10%, and infrastructure was 15%.
The Fitch report said health care “is operating in a stressed environment as hospitals and senior-living facilities are facing uncertainty related to health care reform and the lingering impact of the financial crisis.”
Looking forward, each agency suggested that actions largely will be negative for the next year or longer.
“Given the usual historical lag between economic conditions and their effect on state and local government revenues, we expect governments to find the going tough in the next 12 to 24 months, even if the economy shows more signs of recovery in 2010,” Standard & Poor’s said.
The Moody’s report noted that as the economy emerges from recession, “the impact on municipal credit quality remains negative and we expect negative trends to continue for the next 12 to 18 months.”
Fitch noted that as of late January, negative outlooks outweighed positive outlooks by four to one, and negative watches outweigh positive watches by seven to one, indicating that the negative trend in unlikely to reverse course anytime soon.
However, Standard & Poor’s said: “Most governments will be able to make the tough fiscal choices to see them through,” and added that defaults in the muni world aren’t expected to reach the levels seen in the corporate sector.
Moody’s mentioned that while there is “clearly a negative trend in rating actions, the total number of rating actions represents a small portion of Moody’s overall public finance ratings universe.”
Similarly, Fitch noted that in the fourth quarter, 71% of actions were affirmations “with no change in outlook or watch status.” And entering 2010, 87.3% of public finance credits rated by Fitch had a stable outlook.
