With a shortage of available credit and liquidity facilities shutting municipal issuers out of the short-term markets despite record-low rates, issuers with "moderate to low levels" of liquidity could see their credit affected, Moody's Investors Service said in a report released last week.
The supply of credit facilities is more limited and the terms and costs imposed by providers are higher than in the past. This could create added expense for issuers that fail to renew existing facilities, forcing them to restructure into more expensive forms of financing or to pay higher interest rates on bank bonds.
"Those issuers that restructure or refinance existing hedged [variable-rate demand obligations] into another debt structure may be faced with a termination payment if they elect to terminate the swap hedging the debt," Moody's analyst Sarah A. Vennekotter wrote. "Issuers that are unable to obtain needed LOCs or SBPAs for expiring facilities on existing VRDOs and cannot restructure or refinance their debt will likely face higher rates and accelerated repayments following the bank purchase of their debt upon expiration of the facilities."
Supply of letters of credit and standby bond purchase agreements has tightened as banks face more stress, and some credit providers - specifically some European banks - have exited the market, according to Moody's. It said the available credit facilities are more expensive, have "stricter covenants," and "shorter facility terms."
The difficulty obtaining credit and liquidity facilities has led to a sharp decline in variable-rate issuance. A total of 253 variable-rate issues with short puts have come to market in 2009 with a par value of $12.7 billion, down 77.3% from last year when issuers rushed to refinance auction-rate debt, according to Thomson Reuters. Letters of credit have fallen 67.1% to $9.6 billion, while standby bond purchase agreements fell 94.8%.
The lack of short-term supply has sent variable-rate yields to record lows. The weekly yield on the SIFMA municipal swap index registered at 0.39% on May 27, down from 0.42% on May 20.
"Yields on short-term instruments remain painfully low and unlikely to move higher any time soon," Citi managing director and fixed-income strategist George Friedlander wrote in a recent report.
Moody's said issuers having difficulties obtaining credit facilities for a new issue or refinancing or forced to pay bank bond interest rates "may have to consider other financing options, whether it be through a private bank loan, fixed-rate issuance, or other form of debt structure."
Issuers unable to refinance debt that has become bank bonds may face "accelerated repayment of their debt due to bank bond term-out provisions that are shorter than the original debt structure," Moody's said. Issuers with modest to low liquidity would be most affected, the rating agency added.
Moody's has taken rating actions in some instances related at least somewhat to the risk of accelerated repayment under bank liquidity agreements, it said.
"While the situations in which credit quality has been significantly impaired because of an inability to renew or access a bank facility have been limited during the current economic and credit market cycle, we have taken rating action in several cases during this cycle where the risk of non-renewal or accelerated payout of bank bonds impacted credit quality," Moody's said.