Moody's Investors Service Tuesday downgraded a swath of taxable bonds backed by federal leases in a sweeping rating action that pushed most of the formerly investment-grade sector into junk-bond territory.
Moody's cut ratings on 15 federal lease-backed bond issues to Ba1 and placed them under review for further possible downgrade. It placed another seven federal lease ratings under review for a possible downgrade.
The actions included 19 ratings on deals "with renewal and refinancing risk" and three ratings on federal lease revenue bonds without renewal risk but that may be subject to increased early termination risk, Moody's said in its
The actions come amid the Trump administration's efforts to shrink its office space and as many leases are set to expire before the debt matures. Moody's
The debt represents a $3 billion segment of the municipal bond market, consisting primarily of taxable revenue bonds backed by federal lease payments.
Roughly 87% of the sector is now in high-yield territory, said Mikhail Foux, head of municipal research and strategy at Barclays Capital.
"They took the whole sector to high yield," Foux said. "It was a pretty aggressive downgrade across the board. I won't say that I agree with it."
Barclays in February 2025 put out a
When asked about timing, a Moody's spokesperson said the downgrades were prompted by "a general trend towards different choices by the federal government for non-renewals, partial renewals, delays in renewals that has led us to reassess likelihood of renewal."
The agency also pointed to examples of recent decisions that reflect the trend.
The Sandia Labs Administration Building, which Moody's rates Ca/negative, defaulted on bonds on Aug. 1 and now faces "challenging prospects to realizing a high recovery for bondholders," Moody's said in a Sept. 22 report. The federal government contractor opted not to renew the lease on the building and it's "not clear whether there will be a new tenant or buyer to provide cashflow to fund debt service," Moody's said.
Bondholders of the Southwest Region Headquarters for the Department of Interior's Bureau of Indian Affairs also face potential losses amid expired leases even as the government continues to pay rent under an agreement with the owner, Moody's said in a Sept. 9 report.
In Tuesday's action, analysts said there is "rapidly reduced predictability" in federal lease renewal decisions and that "outcomes are increasingly diverging from what a property's essentiality might suggest."
The actions also reflect "a lack off timely, publicly available information from the federal government regarding their asset-specific real estate plans, particularly for leases that are expiring within the next two years," Moody's said.
The sweeping downgrades could bring pain to some bondholders, Foux said.
"You had high-grade bonds that overnight became high-yield bonds, so some of the holders may not be able to hold it anymore," Foux said.
He estimated that mutual funds own 30%-40% of the sector and that insurance companies and foreign investors are also owners.
The downgrades affect a variety of credits across the country, many of which were rated Baa1 or Baa2. Veterans Affairs hospitals in Cleveland, Ohio, Butler, Pa., and Eugene, Ore., were cut to junk, as were FBI buildings in Cincinnati and San Diego.
As of Wednesday there was little trading on the bonds, many of which already trade at distressed prices.
In one of the most recent round-lot trades, a chunk of Cleveland-Cuyahoga County Port Authority federal lease revenue bonds issued for the VA Cleveland Health Care Center project with a 4.425% coupon due in 2031 traded for 65.5 on Aug. 12 — down from 86.3 on Feb. 6.
Robert Slavin contributed to this report.
