WASHINGTON — A gradual economic recovery helped the credits of municipal bond issuers in 2013 and led to fewer downgrades than upgrades of debt, Fitch Ratings said in a report issued Wednesday.
There were 189 downgrades in 2013 versus 198 downgrades in 2012, according to the report. The agency upgraded 101 muni credits in 2013, up from 84 in 2012. Downgrades last year represented 5.3% of all rating actions and $137.4 billion in par value, while upgrades represented 2.8% of all rating actions and $121.5 billion in par value. Negative rating watches decreased to 40 from 49. The number of Positive Rating Outlooks increased to 85 from 61.
The report covers all sectors of Fitch's portfolio. Local tax-supported debt was the most volatile sector and did not contribute to the more favorable upgrade-to-downgrade ratio in 2013, the report shows. That debt was prone to downgrades despite improving revenues thanks to constraints on expense flexibility and pressures from pension and other retirement benefit contribution obligations, Fitch analysts determined. There were 43 upgrades of local tax-supported bonds, while there were 113 downgrades of such debt or 60% of Fitch's total downgrades.
"Tax-supported rating downgrades in 2013 outpaced upgrades by a wide margin," they wrote. "The most significant credit event for local governments in 2013 was the July 18 bankruptcy filing by Detroit, Mich."
Other parts of the Fitch portfolio were more stable and more positive, according to the year-end numbers. Fitch upgraded Alaska, California and Michigan state obligations, and downgraded Illinois, Maine and Pennsylvania. There were 24 downgrades and 16 upgrades in the health care sector. Four public power credits were downgraded and seven were upgraded. Fitch upgraded 20 water and sewer bonds and cut the rating on 13 of them. Eleven transportation credits were upgraded in 2013, the highest number of upgrades since 2006, while four credits were downgraded, the lowest number since 2008.
Downgrades have outnumbered upgrades in each of the last five years, but Fitch said market participants should remember the wider perspective.
"It is important to note that downgrades account for a small percentage of total public finance rating," the agency said in a statement released alongside the report. "A majority of rating actions (85%) during the year were affirmations. Additionally, 90% of rating outlooks were stable at the end of 2013."
