Moody’s Places 177 Local Muni Issuers on Downgrade Review Amid Debt Debate

Moody’s Investors Service placed 177 top-rated municipal-bond issuers with a combined $69 billion of debt outstanding on review for possible downgrades as it evaluates its Aaa rating of the U.S. government.

The change affects 162 local governments in 31 states, 14 housing-finance programs and the University of Washington in Seattle, the company said today in a statement. All have high exposure to federal spending changes and market volatility, Moody’s said. The largest numbers of local issuers on review are in Virginia, with 15, and Massachusetts, with 14, Moody’s said.

Moody’s put the U.S. rating under review July 13 as talks stalled in Washington on raising the government’s $14.3 trillion debt ceiling. The company also said a U.S. cut would trigger automatic reductions for 7,000 top-graded municipal credits. On July 19, the company placed Aaa rated Maryland, New Mexico, South Carolina, Tennessee and Virginia on review because of their reliance on federal spending.

“We could see the market spreads widen over time as the ratings are recalibrated downward,” said Peter Delahunt, managing director of trading risk in Raymond James & Associates Inc.’s municipal bond group in New York. “Inherent in a rating downgrade is the implication of extended risk.”

Housing Programs

In today’s notice, Moody’s included lending programs run by the Colorado Housing and Finance Authority, the Idaho Housing and Finance Association, the Kentucky Housing Corp. and the Utah Housing Corp. among those with $4.3 billion in debt under review. It cited high levels of government mortgage insurance as well as high delinquency and foreclosure rates, and said each would be subjected to stress tests in the event of a U.S. cut.

“The ratings of these local governments, particularly those with a high economic dependence on federal activity, would be vulnerable to a downgrade of the U.S. government,” Matt Jones, a Moody’s senior vice president whose team covers local governments, said in the statement. The company also cited “sensitivity to deteriorating macroeconomic conditions and vulnerability to disruptions in the financial markets.”

The University of Washington, a state-run institution with $1.3 billion of debt under review, has an “unusually large” share of revenue from federal research grants and reimbursements for Medicare and Medicaid programs, the statement said. The school also runs hospitals and medical clinics in Washington.

In a related matter, Moody’s said the Smithsonian Institution in Washington, D.C., won’t have an automatic rating cut if the U.S. is downgraded, as its linkage to the federal government’s credit is indirect. On July 13, the company included the organization among those that would be cut because of direct linkages to the U.S. rating.

To contact the reporters on this story: Sarah Frier in New York at sfrier1@bloomberg.net;

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net

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