S&P downgrades 11,500 munis tied to U.S.

More than 11,000 municipal bonds tied to the federal government lost their AAA ratings from Standard & Poor’s, including housing securities and debt backed by leases, after the company downgraded the U.S. S&P assigned AA+ scores to about 11,500 securities in the $2.9 trillion municipal bond market, according to data compiled by Bloomberg. They include school-construction bonds in Irving, Texas; debt backed by a federal lease in Miami; and a bond series for multifamily housing in Oceanside, Calif. Yesterday’s cuts also affected debt backed by Fannie Mae and Freddie Mac and so-called pre-refunded bonds, which are paid off with income from Treasuries bought with borrowed funds. No state general-obligation ratings were changed, and S&P said many borrowers should remain AAA. “They made it clear that there are going to be states that can continue to be AAA, and that was a concern,” said Tom Kozlik, director of municipal credit analysis for Philadelphia brokerage Janney Montgomery Scott. State and municipal governments that depend less on the national government for revenue and that manage their own books well enough to weather declines in federal funding may retain AAA ratings, S&P said. The company didn’t name such states or municipal governments. The credit-rating company still rates the general- obligation debt of nine states AAA. The country’s “decentralized governmental structure” calls for an independent review of state and local government credits, 3.9 percent of which have AAA ratings, S&P said. Traditional Warning Kozlik said S&P would likely telegraph any state rating cuts by first changing its outlook, as is traditionally done. It’s unclear how federal budget cuts agreed to last week in an agreement to raise the U.S. borrowing limit will affect individual states since the details have yet to be hammered out by Congress. “We really have to see what it is they will be facing,” he said. Officials in AAA rated Maryland and Virginia, whose economies are bound to the federal government, said yesterday they hadn’t heard from S&P since the U.S. downgrade and didn’t think any moves were imminent. “I would think S&P would want to take some time,” said Patti Konrad, Maryland’s director of debt management. “We haven’t heard anything.” Ripple Effect Ric Brown, Virginia’s finance secretary, said his office hasn’t spoken to S&P and that any move affecting the state would be based on how federal budget cuts ripple through the economy. “It’s probably going to take a little bit of a while until they know specifically what’s on the table to assess that,” he said. S&P, in lowering the U.S. on Aug. 5 from AAA, cited politics in congressional negotiations to increase the federal debt ceiling and said lawmakers failed to reduce spending enough. Moody’s Investors Service and Fitch Ratings affirmed their top ratings on Aug. 2, the day President Barack Obama signed the bill raising the debt ceiling and avoiding a default. For the municipal market, “the key is supply and demand,” more than ratings downgrades, said Ed Reinoso, chief executive officer of Castleton Partners in New York, which manages about $250 million for individuals. The S&P action itself “was almost cosmetic,” he said in a telephone interview. “It doesn’t seem to have much impact.” Falling Sales Municipal issuance has fallen amid the U.S. debt-ceiling impasse. Sales planned for the next month total $3.82 billion, the lowest 30-day supply since May 27, according to data compiled by Bloomberg. The sales slump and signs of a slowing economy helped drive yields on top-rated 10-year tax-exempt debt to 2.39 percent, the lowest since October, according to a Bloomberg Valuation index. Mutual funds required to invest in AAA bonds will be most affected by the municipal downgrades and may be forced to liquidate some holdings, said Bud Byrnes, chief executive officer of Encino, Calif.-based RH Investment Corp.. “They will have a hard time replacing that yield,” he said. --Bloomberg News--