Moody's Downgraded Record $311B of Debt in 2012

Moody’s Investors Service downgraded a record $311 billion of public finance debt in 2012, surpassing the previous 2009 record of $256 billion, a negative trend that the rating agency said is likely to continue this year.

The 2012 downgrades, 824 in total, were a 60% increase over the $194 billion of debt in 518 downgrades the previous year, Moody’s said in a 16-page report released Friday.

The 187 upgrades of $24 billion of debt in 2012 represented a 50% gain from 125 upgrades of $13.24 billion of debt for 2011, based on dollar amounts.

“For 2013, we expect downgrades to continue outpacing upgrades in most public finance sub-sectors, albeit at a reduced pace as the economic recovery continues and the housing sector begins to strengthen,” said Moody’s assistant vice president Eileen Hawes, lead author of the report.

Moody’s assesses approximately 14,000 public finance debt issuers, 6% of which were affected by downgrades last year.

In the fourth quarter alone, Moody’s downgraded 171 issuers with a total of $95 billion of debt, while upgrading 29 issuers with $4.2 billion of debt. Almost 50% of the downgrades were related to issuers in Puerto Rico, including the Commonwealth itself, Moody’s said.

The 2012 downgrades underscore the persistent lackluster economic and industrial conditions for state and local issuers as well as strained budgets, the credit agency said in a release.

The major risk for public finance issuers in 2013 will be the federal government’s ongoing deficit reduction discussions on Capitol Hill, it said.

Lawmakers and the White House have yet to agree to a long-term debt agreement to resolve the nation’s federal borrowing authority, a permanent budget to keep the government operating beyond March 27, or agreement on how to manage the looming across-the-board, automatic budget cuts.

Municipalities faced 608 and $94 billion of downgrades in 2012, up 70% from 346 and $55 billion in 2011, based on dollar amounts. Upgrades for more than 5,300 localities and over $5 billion of debt were about the same for both 2012 and 2011.

In the fourth quarter, twenty-two cities and counties in California were downgraded as a result of pension obligation bonds and/or lease debt, both of which are unsecured general fund obligations.

Outsized unfunded pension obligations and associated pressures on operating budgets were the primary drivers of $127 billion of debt downgraded for states in 2012. There were a total of 42 downgrades last year compared with just 18 and $38.9 billion of debt in 2011.

“State tax revenues largely improved in 2012, and some states have begun to rebuild reserves, however the pace of economic recovery and revenue growth is likely to remain subdued while pension, health care and other expenditure pressures remain elevated,” the report said.

In the fourth quarter, Moody’s downgraded all standalone federal highway and mass transit grant revenue anticipation bonds, called Garvees, as well as the Commonwealth of Puerto Rico’s general obligation bonds.

The rating change on the 27 Garvee bond programs, affecting $9.3 billion of debt, was largely based on “challenges of federal deficit reduction and increased uncertainty of long-term federal transportation funding,” Moody’s said. These programs are secured by pledges of federal highway aid or mass transit aid.

Moody’s upgraded two state revolving funds in 2012, including the New York State Environmental Facilities Corp.’s pooled revolving fund programs. SRF bonds are typically stable with no rating changes, Moody’s noted.



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