NEW YORK - U.S. public finance issuers have found solutions to all expiring letters of credit (LOC) and liquidity facilities supporting variable rate demand bonds (VRDBs) rated by Moody's Investors Service in the first three quarters of 2011, says the rating agency in a report.
"The unprecedented volume of bank facility expirations in 2011coincides with a challenging economic backdrop," said Moody's Vice President-Senior Credit Officer Thomas Jacobs, a co-author of the report. "Despite continued pressure on both municipal issuers and banks, issuers across sectors and credit profiles found a variety of options to address their expiring facilities."
In light of current credit pressure on many European banks formerly active in the market, Moody's found that issuers in the third quarter relied more heavily on U.S. banks as they rolled over their VRDB support facilities.
"We expect that to continue," said Jacobs.
The large number of expirations this year, affecting approximately $130 billion in variable rate demand bonds, resulted from the massive VRDB issuance from the end of 2007 through late 2008. This was due to the weakness and subsequent collapse of the auction rate market, the credit deterioration of the bond insurers, and broad-based market dislocation in late 2008. Moody's rated some $83 billion in debt with facilities expiring this year with the third quarter recording 460 expirations of facilities that totaled $21 billion.
In the first three quarters of 2011, 75 percent of Moody's-rated transactions with expiring facilities had the existing facility extended or found a replacement support provider. Low issuance of bank-supported variable rate debt in 2011 contributed to the availability of LOC and liquidity support for issuers with expiring facilities. In the remaining 25 percent, the majority of issuers replaced their bank-supported variable rate debt with publicly offered bonds, private placements, or direct loans from banks, an option gaining significant market share as an alternative to bank-supported VRDBs.
"The results in 2011 bode well for the remainder of the year and into 2012, another year that will see a high volume of expiring bank facilities," said Vice President-Senior Analyst Robert Azrin, a co-author of the report. "While not as heavy as 2011, 2012 is on track to record a high volume of expiring credit and liquidity facilities with approximately $100 billion in support facilities set to expire."
