Municipal bond crunch

New York-based Fitch Ratings said the accelerated pace of U.S. municipal downgrades in the second quarter of 2009 will continue through the remainder of 2009.

Fitch said the poor economy is placing budgetary pressures on most of the cities with outstanding bonds, which resulted in twice as many downgrades as upgrades in the second quarter. Measured by dollar volume, downgrades outpaced upgrades by a margin of 17:1 — due primarily to Fitch’s downgrade of California’s $79 billion in general obligation and appropriation-backed debt.

FITCH REPORT DETAILS
• During the second quarter, Fitch’s U.S. public finance group downgraded 52 ratings totaling $103.4 billion while upgrading only 24 ratings totaling $6.1 billion.

• The 227 U.S. Public Finance ratings with Negative Outlooks at the end of the second quarter, a 28% increase from the end of the first quarter, is the highest number of public finance ratings with a Negative Outlook Fitch has had since Fitch began tracking the number in 2002.

• The number of ratings with a Positive Outlook declined to 84, a net decrease of seven.

• “Fitch believes it is important to note that approximately 89% of the Rating Outlooks assigned to Fitch’s U.S. public finance ratings are Stable and 75% of the second quarter rating reviews resulted in rating affirmations, with no change in Rating Outlooks.”

• Other than California, significant downgrades included the state of Ohio’s $7 billion of general obligation bonds and $3.7 billion of appropriation-backed bonds; Cook County, Ill., $3.4 billion of general obligation bonds; and Sacramento County, Calif., $1 billion of various appropriation-backed bonds.

• The largest upgrades were for San Diego, Calif., $1.3 billion in sewer revenue bonds; Leander Independent School District, Texas’ $1.2 billion in general obligation bonds; and the state of Pennsylvania’s $934.9 million in PICA revenue bonds secured by a wage and net profits tax levied in the city of Philadelphia.

• The tax-supported sector primarily drove rating action trends in the second quarter, with 16 of the 24 upgrades and 30 of the 52 downgrades, reflecting the high number of Fitch’s U.S. public finance ratings in this sector.

• Fitch noted the upgrades/downgrades by sector: Health care had two upgrades versus seven downgrades. Three sectors had only downgrades; transportation (seven), higher education and non-profits (four), and public power (two). Upgrades outnumbered downgrades in the water and sewer sector, five to two.