WASHINGTON — Moody's Investors Service said it upgraded 97 credits in the municipal market in the first quarter of 2014, the most since the third quarter of 2009.
Almost half of the upgrades occurred because the rating agency updated its methodology for evaluating the credit quality of local government general obligation debt. Also, sustained revenue growth improved some issuers' financial positions, Moody's said in a report issued on Tuesday.
Still, the upgrades were outnumbered by the downgrades of 150 credits during the quarter. The first quarter downgrades made up 61% of the rating changes, the lowest quarterly percentage in almost three years. There have been more downgrades than upgrades in every quarter since 2008, Moody's said in a release.
Nearly $120 billion of debt was downgraded during the first quarter of this year, while $14.4 billion was upgraded. The amount of debt downgraded greatly exceeded the amount of debt upgraded because a few issuers that were downgraded have a large amount of rated debt, Moody's said.
"Most public finance sectors are seeing improvements in credit quality, which will contribute to increased upgrades if those trends continue," Moody's analyst Chandra Ghosal said in the release. "However, pressured sectors and regions will weigh on overall rating activity, resulting in a larger number of downgrades for the remainder of the year in most sectors."
Only 57% of rating changes in the local government sector were downgrades in the first quarter, compared to 71% in the fourth quarter of 2013 an average of 81% for all of last year. The main driver for local government rating changes was Moody's updated methodology, the rating agency said.
In terms of par value, downgrades represented 90% of local government rating changes. Downgrades for Chicago and the Chicago Board of Education accounted for 66% of the par value of the local government downgrades, Moody's said.
The rating agency said it downgraded 17 credits, with no upgrades, in the state and state-related sector. The downgrades included $55 billion of debt issued by Puerto Rico and $6 billion of debt relating to 16 grant anticipation revenue vehicles.
Moody's made downgraded 14 credits and upgraded six in the not-for-profit hospital sector during the first quarter, but a greater dollar amount debt was upgraded than was downgraded. "This suggests rating downgrades were largely concentrated among small hospitals, which also tend to be rated lower," the report said. Nine of the downgrades in the sector were hospitals with junk bond ratings, and three of the upgrades were associated with mergers and affiliations.
There were 15 downgrades and eight upgrades in the higher education and other not-for-profit sector, but the number of upgrades was the highest since the fourth quarter of 2009. The downgrade of the University of California affected $18.8 billion of debt and accounted for 90% of the downgraded par amount of debt in the sector, the rating agency said.
Moody's made three upgrades and one downgrade in the infrastructure sector. This is a reversal from 2013, when downgrades led upgrades in the sector each quarter. The Puerto Rico Electric Power Authority was the downgraded entity, while one public power issuer and two airports were upgraded, the report said.
In the housing sector, Moody's upgraded two credits and downgraded one. In addition to the upgrades, the rating agency made several favorable outlook changes to housing finance agency issuer ratings and single-family programs.
