Fully 79% of Moody’s Investors Service’s ratings actions in the third quarter were downgrades.
Since the first quarter of 2009, Moody’s review of U.S. public finance has led to far more downgrades than upgrades. Moody’s has downgraded $200 billion this year so far, more than it downgraded in all of 2011.
“Increased risk associated with difficult economic and industry environments, stressed budgetary and reserve positions, and challenging debt structures are the principal factors driving the downgrades,” Moody’s wrote.
During the third quarter, in the state and state-related sector Moody’s downgraded five debt issuers and upgraded two. In par value it downgraded $31.49 billion and upgraded $.34 billion.
In the quarter Moody’s downgraded Pennsylvania’s general obligation bonds to Aa2 with a stable outlook from Aa1 with a negative outlook ($13 billion in debt); Puerto Rico Sales Tax Financing Corporation senior and subordinate lien sales tax revenue bonds to Aa3 with a stable outlook from Aa2 with a stable outlook and to A3 with a stable outlook from A1 with a stable outlook, respectively ($16 billion); and the Metropolitan Atlanta Rapid Transit Authority (MARTA) third lien sales tax revenue bonds to A1 with a stable outlook from Aa3 with a negative outlook ($1.43 billion).
Also in the third quarter, in the local government sector Moody’s dropped the ratings on 90 government entities and raised them on 25. In par value, it dropped ratings on $15.37 billion and raised them on $1.08 billion.
Moody’s downgraded Chicago Board of Education general obligation bonds to A2 with a negative outlook from Aa3 with a stable outlook ($6.4 billion) and Omaha, Neb. general obligation unlimited tax bonds and general obligation limited tax lease rental to Aa1 with a stable outlook from Aaa with a stable outlook ($689 million).
For Moody’s the not-for-profit hospitals sector was one bright note in the third quarter. According to its report, “U.S. Public Finance Rating Revisions for Q3 2012,” Moody’s upgraded 12 of these hospitals while downgrading seven of them. The story by par value was even more positive, with Moody’s upgrading $3.16 billion and downgrading $.96 billion. “However, we note that half of the 12 upgrades (and one of the downgrades) in third quarter 2012 are due to consolidations or favorable lease agreements, rather than a gradual improvement in fundamental credit quality.”
Moody’s upgraded Poudre Valley Health Care and University of Colorado Hospital Authority, both located in Colorado, after they merged to form University of Colorado Health. The former had been A2 with a stable outlook and the latter had been A3 with a positive outlook. The new entity is A1 with a stable outlook ($1.25 billion in debt affected).
In the infrastructure sector, during the quarter Moody’s downgraded six issuers and upgraded two. “The number of downward rating actions has begun to level off and overall conditions in the infrastructure sector are showing some signs of stabilization,” Moody’s wrote.
In the quarter Moody’s downgraded the Port Authority of New York and New Jersey to Aa3 with a stable outlook from Aa2 with a negative outlook ($18.2 billion) and the Chicago O’Hare Airport Enterprise — third lien general airport revenue bonds to A2 with a stable outlook from A1 with a negative outlook ($6.5 billion).
In the higher education and not-for-profit sector and the housing sector Moody’s was entirely negative. It downgraded nine issuers in the former and 33 in the latter and upgraded none in either sector. However, total par value downgraded was below $1 billion in each sector.
In a separate report issued Wednesday on speculative-grade local governments, Moody’s reported that it is giving speculative grades to 30 of these governments, up from 25 in September 2011. The 30 are only about 0.4% of all of Moody’s rated local governments.
The 30 governments have “an aggregate debt outstanding of approximately $10 billion, with more than 85% of the total attributable to Philadelphia School District, Pa. (Ba1 with a negative outlook), City of Detroit, Mich. (B3 on review for a downgrade), Detroit Public Schools, Mich. (B1 issuer rating with a negative outlook), and Jefferson County, Ala. (Caa3 with a negative outlook).”
“Michigan, Rhode Island, New Jersey and Minnesota account for about 8% of the US population but represent half the number of local government speculative-grade credits, highlighting regional socio-economic factors and lax governance,” Moody’s wrote.