The ratio of upgrades to downgrades among municipal credits remained positive for the first quarter of this year, though it declined from previous quarters because of increased costs on auction-rate securities and softening credit conditions for specific issuers, according to Moody's Investors Service.

In the first quarter of 2008, Moody's made 208 rating changes, according to its first quarter trend report. Of these, 157 changes were upgrades compared to 51 downgrades, resulting in an upgrade-to-downgrade ratio of 3.1-to-1 for all sectors. This compares to an overall ratio of 6.0-to-1 for the third quarter of 2007, and 4.5-to-1 for the fourth quarter.

"U.S. municipal credit conditions remained positive in the first quarter of 2008, but deteriorated from levels reached in prior quarters, as issuers faced pressures from unexpected costs on auction-rate securities and from slowing economic growth," Moody's said in the report.

More specifically, state and local governments saw a sudden decline after six quarters where upgrades far outnumbered downgrades. Among 138 ratings changes, 111 were upgrades in the tax-backed sector compared to 27 downgrades, for a ratio of 4.1-to-1, Moody's said. The ratio for the fourth quarter was 10.4-to-1.

In the revenue-backed sector, upgrades outnumbered downgrades, 46 to 24, for a ratio of 1.9-to-1, Moody's said. As opposed to state and local governments which are feeling an economic pinch, the ratings on revenue bonds saw only a small decline from the fourth quarter, when 88 changes led to a 2.3-to-1 ratio.

The rating agency said many of the ratings changes reflected conditions specific to issuers rather than broader economic or credit-market conditions. For example, the most prominent downgrade among issuers affected Jefferson County, Ala., which is suffering from a unique confluence of dislocations, such as rising variable rate interest rate costs, swap exposure, and downgrades to the financial guarantors that guarantee the county's debt.

The downgrade to Jefferson County accounted for 61%, or $4.6 billion, of the par value for downgrades in the quarter, Moody's said.


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