NEW YORK - Despite signs of a U.S. economic recovery, the negative pressure on municipal credit continued through the second quarter of this year, says Moody's Investors Service in a report on rating revisions for the period.
"Nevertheless, the number of rating changes for the quarter was modest compared to the overall portfolio of Moody's-rated municipal credits," said Moody's Assistant Vice President -- Analyst Elizabeth Foos, author of the report.
The ratio of municipal scale upgrades-to-downgrades decreased modestly in the second quarter to 0.6-to-1 from this year's first quarter ratio of 0.7-to-1, and is one of the lowest ratios recorded for this measure in at least the last five years and is significantly lower than the 1.1-to-1 ratio experienced in the second quarter of 2003, one year after the last national economic recession. The current period of downward pressure began in the third quarter of 2008.
The ratio of upgrades-to-downgrades based on affected par value also declined in the second quarter of 2010 to 0.2-to-1 from 0.6-to-1 in the first quarter of 2010.
"Despite this negative trend in rating changes, the overwhelming majority of ratings remained stable throughout the review period, reflecting some resiliency in the municipal marketplace" said Foos.
The report, "U.S. Public Finance Second Quarter 2010 Rating Revisions," outlines the trends in each sector of public finance, discusses key factors behind the trends, and highlights the most significant rating changes that occurred in the quarter.
"Most major municipal sectors continue to face credit pressures due to deteriorating revenue streams, increasing expenditure needs, and weakened balance sheets," said Foos. "These include state and local governments, healthcare, higher education, housing and airports."
Illinois was the most prominent issuer downgraded during the second quarter as the state's general obligation (G.O.) bond rating was changed to A1 from Aa3 and all ratings linked to Illinois' G.O. debt also were lowered by one notch. These included Metropolitan Pier and Exposition Authority debt, which was downgraded to A2 from A1, and Build Illinois sales-tax revenue bonds, which were downgraded to A1 from Aa3.
The downgrades, which affected approximately $29 billion in debt, accounted for approximately 53% of the total par amount of debt downgraded in the quarter. The second largest rating action in the quarter was the downgrade of the California Housing Finance Agency's Home Mortgage Revenue Bond to A3 from Aa3. The downgrade affected approximately $6.6 billion of outstanding debt, or 12% of the total par amount of debt downgraded in the quarter.
