For the ninth consecutive quarter, U.S. public finance rating downgrades outnumbered upgrades during the first quarter of 2011, according to a new report by Fitch Ratings.
The ratio of downgrades to upgrades also increased when compared to the previous quarter to 2.4 to one, up from 2.3 to one in the fourth quarter of 2010.
The trend does not appear to be reversing anytime soon as negative rating outlooks outnumbered positive ones by almost four to one in the first quarter. Credits put on negative watch also outweighed credits put on positive watch by 15 to one.
Sarah Repucci, an analyst at Fitch, said downgrades will continue to outpace upgrades because of the economy.
“In this economic environment, state and local governments still experience financial pressure,” she said. Repucci added that while it’s hard to tell how long downgrades will outpace upgrades, it could certainly last through the remainder of the year and into 2012.
“Nothing in this report is surprising,” Repucci said. “Considering the economic circumstances we are still in, we will continue to have these pressures.”
The number of downgrades was at its second-highest level in eight years, with 63 downgrades in the first quarter, representing $22.6 billion of outstanding debt and second only to the fourth quarter of 2009, when Fitch downgraded 70 credits. Downgrades are also up significantly from the fourth quarter of 2010, when Fitch downgraded 46 credits. Upgrades for the first quarter totaled 26, or $2 billion, up from 20 credits upgraded the quarter before.
Fitch noted the $2 billion in par value of upgrades was significantly lower than previous quarters and the $22.6 billion in par value of downgrades increased significantly from previous quarters. One of the larger downgrades was the Clark County, Nev., School District, which operates the nation’s fifth-largest school system. Approximately $4.2 billion of limited tax general obligation bonds were downgraded to AA-minus from AA.
The biggest sector to struggle was the tax-supported market, with 36 credits downgraded, up from 22 credits that were downgraded the previous quarter. The water and sewer revenue sector saw the second biggest change, with 12 downgraded credits, up from four in the fourth quarter of 2010. Downgrades in the health care sector slowed, a trend not seen at all in 2010; there were three downgrades in the first quarter, compared to nine downgrades the quarter before.
Tax-supported credits also saw an increase in upgrades, with 11 upgraded credits in the first quarter of 2011, compared with only five upgraded credits the previous quarter.
Moody’s Investors Service found similar results, with downgrades outpacing upgrades in the first quarter, hinting that “2011 is expected to be another challenging year across all major municipal sectors and the toughest year so far for U.S. state and local governments since the beginning of the economic downturn.”
Moody’s assistant vice president Conor McEachern noted it was the ninth consecutive quarter that downgrades exceeded upgrades. “With negative outlooks assigned to all major municipal sectors, the trend is likely to prevail for all of 2011,” he wrote.
Standard & Poor’s analysts disagreed, saying that while the state and local government sector saw an increased number of downgrades, upgrades still outpaced downgrades by almost 1.5 to one.
“Even with some deterioration, credit quality remains relatively high in the U.S. public finance sector as a whole and … during the first quarter of 2011 no defaults occurred among issues,” according to a recent Standard & Poor’s report.
