Rating upgrades increased their share of all rating revisions Moody's Investors Service made on U.S. municipal issuers in the third quarter of 2014, the fourth time their share has increased over the last five quarters, according to a Moody's report.
During the third quarter Moody's upgraded 81 ratings, or 37.3% of the 217 rating revisions Moody's took in total. In the second quarter, 91 upgrades made up 32% of 282 rating changes. With approximately 13,000 rated public finance obligations, Moody's revised the ratings of less than 2% of all public finance issuers during the third quarter.
"After dropping in the second quarter, upgrades have resumed their encouraging trend of becoming a greater share of all rating actions, largely as a result of an improving economy and strong fiscal management," says Analyst Mark Lazarus. "Looking ahead, while downgrades will continue to outpace upgrades the gap between the actions will likely continue to close."
Noting improving trends across most public finance sectors, Moody's expects a higher proportion of downgrades to continue nonetheless for the remainder of the year.
While economic and fiscal conditions in many areas have improved, lagging economic trends and sluggish labor markets in certain regions continue to squeeze some local governments, says Moody's. In the higher education sector, some colleges will continue to face operational pressures, while the not-for-profit healthcare sector will have revenue pressures from limited Medicare increases under the Affordable Care Act.
Sound fiscal management and continued healthy financial profiles led to a number of prominent third-quarter upgrades, notably at the upper end of the spectrum, says Moody's. Examples include upgrades of the ratings on San Diego County and the Denver Board Water Commissioners, both to Aaa.
Conversely, limited fiscal control and weak financial performance resulted in downward rating actions for several large issuers, including the Philadelphia School District, which Moody's downgraded to Ba3 from Ba2, the Commonwealth of Pennsylvania, which the rating agency downgraded from Aa2 to aa3, and the New Jersey Housing and Mortgage Finance Agency, which was downgraded to Aa2 from Aa1.
Through the first three quarters of 2014, the number of upgrades, 241, has already exceeded the number of upgrades in all of 2013 by 41%, although some of the 2014 actions were a result of Moody's revision of its US local government GO methodology. Excluding these actions, the number of upgrades through the first three quarters of 2014 amounts to 91% of all those in 2013.
Par value totals for third-quarter 2014 rating upgrades and downgrades show significant changes from the second quarter, reflecting the swings that can occur due to less frequent rating changes for large state issuers. After a number of upgrades for large states in second-quarter 2014, the amount of upgraded debt decreased 91% in the third quarter to $12.8 billion. The amount of downgraded debt in the third quarter totaled $97 billion, up 15% from the second quarter as a result of several Puerto Rico related actions.
