WASHINGTON — An expected economic slowdown this year, driven by the subprime mortgage crisis, will negatively affect bond issuers to varying degrees, but widespread ratings downgrades should not occur, according to a report released late Monday by Fitch Ratings.
The agency noted several areas of concern this year, including reduced property and sales tax collections by state and local governments, and higher costs of capital stemming from increased rates and yields.
However, while the year does hold pitfalls, the impact will not be spread evenly nationwide, and most issuers are expected to maintain their ratings, analysts said.
“Fitch expects that most issuers, particularly those that are less affected by the housing slowdown, will likely be able to perform through a downturn at levels consistent with their existing ratings,” the agency said in its report.
Of those that will face challenges this year, analysts expect issuers who recently experienced the fastest growth will be hit the hardest.
“In general, Fitch believes the sharpest valuation declines are likely to occur in regions that had seen the greatest run-ups during the first half of this decade,” the report said.
Revenue bond issuers in fields like health care, higher education, transportation, and utilities are expected to maintain their status quo this year, while tax-backed borrowers will struggle more, the agency said.
The report included the caveat that while issuers by and large should maintain their ratings, if there is a widespread economic recession this year, more credits could be downgraded than originally anticipated.
While the picture appears grim, borrowers can take steps to better handle the expected problems in the coming year. Many have already reduced expectations in terms of revenue growth and spending and “management may be able to offset some of the pressures ... by increasing revenues and/or reducing costs in other areas,” Fitch said.
Governments that have already tempered expectations for this year should handle the year well, but others making new adjustments may face “political or practical ramifications” in attempts to tighten up budgets, the report added.