Fitch: Pace of U.S. Municipal Downgrades Steady in 3Q'09; Negative Trends to Persist

Fitch Ratings notes that the pace of U.S. municipal downgrades (adjusted for the impact of a large number of related housing credits) remained steady in the third quarter of 2009 (3Q'09). Downgrades outnumbered upgrades by more than two to one, similar to the prior quarter. It is likely that downgrades will continue to outnumber upgrades for at least the next year with Negative Rating Outlooks and Watches outweighing Positive Outlooks (more than three to one) and Watches (nearly eight to one). Nevertheless, the majority (61.6%) of rating actions taken during 3Q'09 resulted in affirmations with no Outlook or Watch revisions, and nearly 82% of ratings had a Stable Outlook. Both numbers are down from the prior quarter (75% and 89%, respectively), indicating additional stress.

During 3Q'09, Fitch's U.S. public finance group downgraded 55 ratings totaling $95.6 billion in par value while upgrading 85 ratings totaling $8.8 billion. Of the upgrades, 58 were for mortgage revenue bonds issued by the Idaho Housing & Finance Association. The downgrade to upgrade ratio, excluding the Idaho Housing & Finance association mortgage revenue bonds, was 2.1:1 in terms of rating changes and was nearly identical to the prior quarter ratio of 2.2:1. On a par value basis, the 3Q'09 ratio of 10.9:1 was down notably from the second quarter 2009 (2Q'09) ratio of 17.0:1.

The number of U.S. Public Finance ratings with Negative Outlooks at the end of 3Q'09 increased to 254 from 227. The number of ratings with a Positive Outlook held steady at 84. The increase in the ratio of Negative Outlooks to Positive Outlooks to 3.0:1 from 2.7:1 marked the seventh consecutive quarter that this ratio has increased. There were 37 ratings on Rating Watch Negative and only five on Rating Watch Positive at the end 3Q'09, little changed from the 43 ratings on Rating Watch Negative and four ratings on Rating Watch Positive at the end 2Q'09.

The bulk of the par value in downgrades was attributable to the state of California; on July 6, $69.3 billion in general obligation bonds and $9.7 billion in various appropriation-backed bonds were downgraded to 'BBB' and 'BBB-' from 'BBB+' and 'BBB', respectively. The ratings were removed from Rating Watch Negative and assigned a Stable Outlook.

Other significant downgrades included the state of Michigan's approximately $1.6 billion of general obligation bonds (downgraded to 'A+' from 'AA-'), $3.4 billion of lease appropriation bonds (downgraded to 'A' from 'AA-'), $316.6 million of school loan program revenue bonds (downgraded to 'A' from 'A+'), and $22.9 million of local government loan program revenue bonds (downgraded to 'A' from 'A+'). In addition, $2.3 billion of the Metropolitan Pier & Exposition Authority, Illinois' revenue bonds were downgraded to 'A+' from 'AA-', $1.04 billion of San Jose, California's airport revenue bonds were downgraded to 'A-' from 'A+', with the Rating Outlook maintained at Negative, and $1 billion of Bon Secours Health Care System general revenue bonds were downgraded to 'A-' from 'A'.

The largest upgrades on a par basis were for the San Francisco (City & County) Airport Commission, California's $5.1 billion in airport revenue bonds (upgraded to 'A+' from 'A'); and $959.6 million of Massachusetts Turnpike Authority Metropolitan Highway System's subordinated revenue bonds (upgraded to 'A' from 'BBB'), based primarily on a limited general obligation pledge of financial support provided by the Commonwealth of Massachusetts (general obligation bonds rated 'AA').

The tax-exempt housing sector accounted for the vast majority of rating upgrades in 3Q'09 with 59 out of 85 total upgrades, and this sector also accounted for two of the downgrades. All but one of the 59 upgrades were for various Idaho Housing & Finance Association single family mortgage revenue bond issues. Four sectors had more downgrades than upgrades. The tax-supported sector, Fitch's largest tax-exempt sector in terms of the number of unenhanced ratings, accounted for 34 downgrades and 16 upgrades. The transportation sector had seven downgrades versus two upgrades. The healthcare sector had five downgrades versus four upgrades. The higher education and nonprofits sector had three downgrades and no upgrades. Beyond tax-exempt housing, the water and sewer sector was the only sector with more upgrades (three) than downgrades (two). There was one upgrade and one downgrade in the state program ratings sector.

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