Market participants on Monday reported little immediate impact from Moody’s Investors Service’s $64 billion downgrade of bank-related municipal securities.
In February Moody’s put a range of large global banks on review for a downgrade and made the cuts on Thursday, following on Friday with the downgrade of associated municipal securities.
In April Moody’s stated that a downgrade of some of the large banks could adversely affect variable-rate demand bonds. In that report the agency said that $34.7 billion of rated VRDBs, commercial paper and similar municipal obligations associated with Citibank and Bank of America Merrill Lynch would be affected.
VRDBs are long-term securities with floating rates that investors can put back to issuers to withdraw their money with little notice. Banks guarantee the VRDBs, which are a mainstay of municipal bond money market funds.
As of Monday morning Peter Crane — president of a firm that keeps tabs on money markets, Crane Data LLC — had not seen any impact from the Moody’s action. The downgrade of the banks and the securities connected to them is “another straw on the camel’s back, but it’s not a major problem for funds,” he said.
Over the last few months when Moody’s has rated money market funds, its analysts have been flexible, according to Crane. The agency has not outright banned the holding of second-tier holdings.
Money market industry participant Robert Amodeo saw the likely affects of Moody’s actions as being on downgraded banks’ business rather than on muni securities and issuers.
“We may begin to see municipal issuers of variable-rate demand notes seek liquidity providers with top-tier ratings from all of the nationally recognized statistical ratings organizations, simply because they stand to obtain lower borrowing costs than they would from banks downgraded recently by Moody’s,” wrote Amodeo, head of municipal bonds at Western Asset Management.
Western Asset’s money funds do not own any securities supported by the downgraded banks, Amodeo wrote.
Matt Fabian, managing director of Municipal Market Advisors, said the full impact of the Moody’s action will take time to work through the market.
“In theory, the magnitude of the downgrade means at least some market negatives will follow, but many money market funds and tender option bond programs have been working to mitigate their exposure to Moody’s ratings by replacing or supplementing [them] with other company ratings…. In the longer term, the downgrades could undermine market liquidity and increase the cost of leverage for ostensible TOB users and-or short-term issuers. We’ve advised our subscribers to hold steady on reacting to any related market changes as the longer-term implications may play out over the next few months.”
Bank of America provides credit support for the second-largest amount of short-term credits rated by Moody’s, $27 billion, behind JPMorgan, which did not see its short-term rating changed. Citibank supported $7.8 billion of the credits.
Money market funds generally invest in credits rated at the “tier 1” level.
“If the reviews ultimately result in a contraction in the universe of P-1-rated support providers … it could also result in a spike in reset rates, increased incidence of failed remarketings, and difficulty arranging replacements and extensions of support, particularly for weaker credits,” Moody’s April report stated.
On Thursday, among other actions, Moody’s lowered Bank of America and Citi banks from its tier 1 P-1 rating to the tier 2 P-2 rating. Bank of America and Citi declined to comment.
Moody’s also lowered the short and-or long-term ratings of six other banks closely connected to municipal bonds.
On Friday afternoon, Moody’s followed up on its bank downgrades by downgrading 1675 muni securities that are based on the banks’ support of letters of credit, standby bond purchase agreements and other liquidity facilities.