The placement of four U.S. regional banks' P-1 ratings on Watchlist for possible downgrade are not anticipated to affect the underlying long-term ratings of public finance issuers, says a new report for the Public Finance Group (PFG) of Moody's Investors Service.
On July 27, 2010 Moody's placed the P-1 short-term ratings of the following US regional banks on Watchlist for possible downgrade: Capital One N.A., Fifth Third Bank, Ohio, KeyBank National Association, and SunTrust Bank. These banks have participated in the US public finance credit enhancement business through the issuance of letters of credit or liquidity facilities to support variable rate demand debt or commercial paper.
"We have identified and assessed the Moody's rated public finance issuers with debt that is supported by letters of credit or liquidity facilities provided by the affected banks," said Moody's Lisa Washburn, a managing director in the public finance group. "Our long-term underlying ratings on public finance issuers take into account the risks associated with variable rate demand bonds (VRDBs) and commercial paper (CP) and as a result we do not anticipate that these ratings will be affected solely as a result of the recent actions on the banks."
The recent bank rating actions could affect the marketability of VRDB and CP transactions backed by these banks and result in the tender of some or all of the VRDBs or the inability to roll over maturing CP to new investors. If this occurs and the tendered bonds are unable to be remarketed or maturing CP is purchased by the supporting bank, the debt converts to the bank bond mode or "bank bonds", which typically bear interest at a higher, penalty rate and often are subject to a more rapid principal repayment schedule than contemplated by the original bond amortization schedule.
"The higher rates and more rapid repayment schedule can stress issuers with low levels of liquidity or those that may not be able to quickly refinance or convert the affected debt," said Washburn. "An issuer's ability to manage its exposure to bank bonds is considered in our long-term ratings. However, the continued existence of bank bonds over an extended period of time may have negative rating implications."
