The number of public finance rating downgrades decreased in the third quarter of 2012 as compared to the second quarter, but the dollar amount of downgraded debt increased and pushed the 2012 YTD total above $200 billion, says Moody's Investors Service.
Moody's says $216.6 billion of total downgraded debt through three quarters exceeds the $193.5 billion for 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," says Eileen Hawes, a Moody's Assistant Vice President and Analyst. "We expect overall downgrade activity to continue to surpass upgrades through the end of 2012."
Rating actions on four issuers accounted for over 70% of the debt downgraded in the third quarter. Specifically, Moody's downgraded the ratings on the Port Authority of New York and New Jersey ($18.2 billion by par amount), the Puerto Rico Sales Tax Financing Corporation ($16 billion), the Commonwealth of Pennsylvania ($13.16) and the Chicago O'Hare Airport Enterprise ($6.5 billion).
Despite the larger amount of downgraded debt, the total number of rating downgrades and upgrades during the third quarter was the lowest for any quarter so far in 2012.
At $5.5 billion, the par amount of upgraded debt during the third quarter was approximately half that of the second quarter. Improved financial operations and strengthened reserve positions led to most of the upgrades, says Moody's.
"The not-for-profit hospital sector saw more than $3 billion of upgrades including six changes due to consolidation activity." "In other sectors, the number of downgrades has started to moderate or nearly match upgrades," says Hawes.
In the local government sector downgrades still outpaced upgrades by a large margin, with 90 downgrades during the quarter compared to 25 upgrades, but the ratio of upgrades to downgrades was lower than in the second quarter.
State and state-related issuers saw the downgrade-to-upgrade ratio increase modestly in the third quarter, to 2.5 times, and the par amount of downgraded debt significantly exceeded the upgraded par amount, performance consistent with Moody's negative outlook on the sector.
In addition to not-for-profit hospitals, local governments and state and state-related entities, the Moody's report also covers higher education, not-for-profit entities, infrastructure and housing.