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Moody's Drops Key Banks, Sparking Muni Downgrades

After Moody’s Investors Service downgraded several key U.S. banks late Thursday, the rating agency followed up by lowering ratings on $64 billion of related municipal debt Friday afternoon.

Moody’s downgraded a total of 1,675 U.S. public finance obligations with ratings that are based in whole or in part on support provided by one or more of the 15 banks and securities firms with global capital markets operations that were downgraded Thursday. “Such support includes letters of credit (LOCs), standby bond purchase agreements, and other liquidity facilities,” Moody’s stated.

Moody’s also downgraded the ratings for 24 gas prepayment bond issues totaling approximately $19 billion of debt.

The agency downgraded ratings of “1,163 U.S. public finance sector obligations that are rated based solely on support (in the form of letters of credit and similar support facilities) provided by” the downgraded banks and securities firms, Moody’s said.

“These actions include downgrades of both the long-term and short-term ratings of 415 obligations, downgrades of the long-term ratings only of 687 obligations, and downgrades of the short-term ratings only of 44 obligations that do not have long-term ratings.”

“Moody’s has also downgraded the short-term ratings of 152 U.S. municipal obligations whose short-term ratings are based on standby bond purchase agreements and similar third-party support facilities ('liquidity facilities’) provided by banks and securities firms affected” by the bank and securities firm downgrades, the agency stated.

“Moody’s has also downgraded the short-term ratings of 137 series’ of tender-option bonds supported by third party liquidity facilities provided by banks and securities firms affected by the” downgrades, Moody’s stated.

“In addition, Moody’s downgraded the long-term ratings of 40 Series’ TOBs where the underlying asset is a custodial receipt that is rated based on support provided by” the downgraded banks.

Related to the bank downgrades, “Moody’s has downgraded the ratings of 223 LOC supported U.S. public finance sector obligations the long-term ratings of which are based on a joint default analysis,” the agency said.

“These actions include downgrades of both the long-term and short-term ratings of 41 obligations, the long-term ratings only of 43 obligations and the short-term ratings only of 139 obligations.”

To learn the specifics of which securities are affected and what their new ratings are, go to the News & Events part of the Moody’s website, and find Friday’s press release titled: “Rating Action: Moody’s downgrades US muni obligations backed by banks...”

The press release has links to pages with more specific information.

Eight of the 15 banks and securities firms downgraded on Thursday have significant involvement in the U.S. municipal bond market.

They are JPMorgan Chase & Co., Bank of America Merrill Lynch, Citigroup, Morgan Stanley, and Goldman, Sachs & Co., Barclays, Royal Bank of Canada and UBS.

The banks downgraded on Thursday are: Bank of America NA long-term deposit to A3 from A2, outlook stable, short-term P-2 from P-1; Barclays Bank plc long-term issuer rating to A2 from Aa3, outlook negative, short-term P-1 affirmed; Citibank NA long-term deposit rating to A3 from A1, outlook stable, short-term to P-2 from P-1; Goldman Sachs Bank USA long-term deposit rating to A2 from Aa3, outlook stable, short-term P-1 affirmed; JPMorgan Chase Bank NA long-term deposit rating to Aa3 from Aa1, outlook stable, short-term P-1 affirmed; Morgan Stanley Bank NA long-term deposit rating to A3 from A1, outlook stable, short-term to P-2 from P-1; Royal Bank of Canada (RBC) long-term deposit rating to Aa3 from Aa1, outlook stable, short-term P-1 affirmed; and UBS AG long-term debt and deposit to A2 from Aa3, outlook stable, short-term P-1 affirmed.

Moody’s gave the banks’ holding companies slightly different ratings.

Also on Friday Moody’s announced that less than 5% of 500 municipal issuers may be downgraded in the next few months as a result of the bank downgrades.

The downgrades will be for “long-term bond ratings of [the 500] U.S. municipal issuers that rely on [the downgraded] banks for credit and liquidity support of variable-rate securities — variable-rate demand bonds,” wrote Moody’s spokesman David Jacobson. 

The ratings of the issuers will be put on review for downgrade in the next few weeks.

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