There were 207 rating changes in the first quarter of 2013, of which 83% were downgrades, Moody’s Investors Service found in a new report.
The total par amount of debt downgraded dropped to $27 billion — the lowest since the end of 2011 — during the first quarter of 2013, from $95 billion the previous quarter, the 15-page report said.
Similar to previous quarters, the local government sector accounted for the bulk of rating actions, with 26 upgrades on $7.4 billion of debt and 144 downgrades in the first quarter.
There were no state rating changes during the first quarter. However, Moody’s did change the outlook for Missouri to stable from negative affecting $1.1 billion of debt. As states remain pressured by slow revenue and employment growth, many states have taken proactive budget-balancing actions as well as pension reform measures, the report said.
“We expect rating activity to continue to be skewed toward downgrades over 2013 as local governments continue to struggle with increasing pension and health care costs and constraints on key property tax and state aid revenue sources,” said Moody’s assistant vice president and analyst Eileen Hawes. “Sluggish economic and revenue growth persist in other sectors, including state governments, infrastructure enterprises, and not-for-profit organizations.”
However, as the housing market continues to recover with assessed valuations leveling off in many areas and growing in some areas, a housing recovery could begin to relive significant pressures that hampered local governments for several years, Moody’s said.
California cities and counties took the lion’s share of the rating activity in the first quarter with approximately $19 billion in downgrades and over $7 billion in upgrades. Much of the California rating activity was negative with downgrades of pension obligation bonds and lease revenue securities comprising of most of the actions.
There were two notable upgrades in California. Approximately 55% of the first quarter upgrades affected two issuers in California — Los Angeles and the city and county of San Francisco. Los Angeles was upgraded to Aa2/stable from Aa3/stable affecting $3.3 billion and San Francisco was upgraded to Aa1/stable from Aa2/stable affecting $2.2 billion.
The key area of focus for Moody’s when reviewing California was evaluating the consequences of the stressed credit environment in the state that led to bankruptcy filings by Stockton and San Bernardino, the report said. The review also considered the relative strength of various security pledges in the state such as general obligations relative to lease-backed securities.
Just six issuers — the Dallas Fort Worth International Airport Board, Jefferson County, Ala., San Diego School District, Santa Clara County, San Diego County and Sacramento County — made up over 53% of the first quarter downgrades.
The DFW International Airport Board had the largest downgrade to A2/stable from A1/negative, which affected $4.9 billion in debt.
Moody’s said it will maintain a negative outlook for most public finance sectors despite continuing positive gross domestic product growth and a recovering housing market. “The economy has not experienced enough sustained growth to reverse the negative trend across the U.S. public finance sector,” Moody’s said.
