Speculative-Grade U.S. Localities Set to Increase, Moody’s Says

More U.S. local governments are set to fall below investment grade in the coming year as they recover from the worst recession since the 1930s and become less willing to pay debt service, Moody’s Investors Service said.

The number of localities to which Moody’s assigns speculative grades has risen to 30 from 25 in 2011, the New York-based company said in a report today. The increase reflects 10 new “fallen angels” that had ratings cut below Baa3, Moody’s lowest investment grade. Some entities that were rated junk were either upgraded or had grades withdrawn.

Moody’s cited Vadnais Heights, Minnesota, and Wenatchee, Washington, as examples of localities failing to honor their pledges on enterprise projects. Central Falls, Rhode Island, and Stockton, California, were among municipalities forced to enter bankruptcy in part because of pension obligations.

Related slideshow: Stockton, After the Bankruptcy

“Lack of willingness to pay debt service is emerging as a new theme in public finance,” Anne Van Praagh and other analysts wrote in the report. “Although it’s not expected to become a widespread practice, even among speculative-grade issuers, there are several recent examples of this development.”

The report focuses on municipalities with a general government purpose. That excludes regional development authorities and special districts such as those issuing bonds backed by dedicated revenue.

To contact the reporter on this story: Brian Chappatta in New York at bchappatta1@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net

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