Moody's downgrades $64 billion of U.S. muni debt

NEW YORK/MIAMI: Moody's Investors Service on Friday cut ratings on
$64 billion of municipal bonds, including debt owed by 1,675 local and
state governments, because the obligations rely on 15 global banks the
Wall Street credit agency sees as less steady.
Moody's on Thursday downgraded big banks such as Citigroup
that provided "letters of credit, standby bond purchase agreements, and
other liquidity facilities" backing $45 billion of tax-free debt.
Separately,
Moody's said it was also reducing ratings on $19 billion of pre-paid
natural gas bonds issued by 24 utilities in Tennessee, Kentucky, Texas
and elsewhere because the downgraded banks support certain payment
obligations on the bonds.
Moody's cut the credit ratings of 15
of the world's leading banks by one to three notches to reflect rising
risks of losses they face in volatile capital markets.
Such
ratings cuts typically hurt prices of outstanding bonds and raise
interest rate costs for issuers, but they had little effect on Friday
on muni bond prices.
The lion's share of the state and local
government debt downgrades - 1,163 - hit obligations that were rated
solely on the support provided by the downgraded banks.
The
short-term ratings of 152 U.S. municipal obligations that were rated
based on standby bond purchase agreements and other third party
supports also were cut.
Also downgraded were short-term ratings
of 137 series of tender option bonds that relied on third party
facilities. Tender option bonds typically have floating rates and carry
a promise that the holder can sell the security at certain times.
The
long-term ratings of 40 series of tender option bonds were cut if their
underlying asset was a custodial receipt whose rating depends on
support from one of the 15 banks.
Some 223 public finance sector
obligations supported by letters of credit were downgraded because
their long-term ratings were based on a joint default analysis, Moody's
said.
The agency said the downgrades of the two dozen issues of
gas prepayment bonds, a form of debt public utilities use to lock in
discounted supplies of fuel, were also knock-on actions from Thursday's
rating cuts.
Citigroup, Goldman Sachs Group, Inc, Credit Agricole Corporate & Investment Bank, JPMorgan Chase, Morgan Stanley, Royal Bank of Canada and Societe Generale were among the banks downgraded, Moody's said.
In
addition, Moody's said it expected the bank downgrades to have
relatively little effect on long-term bond ratings of variable-rate
securities issued by U.S. cities, states and counties.
About 500
municipal issuers, including about 250 local governments, have
outstanding variable-rate demand bonds that are supported by letters of
credit or standby bond purchase agreements with banks, but the ratings
of fewer than 5 percent may be affected, Moody's said in a statement.
"Those
ratings will be placed under review for possible downgrade over the
next few weeks. Moody's does not expect to place any state government
ratings under review," the rating agency said.- Reuters