Following its downgrade of the U.S. government's credit rating, Standard & Poor's whipsawed markets again by saying that downgrade doesn't necessarily imperil triple-A ratings for state and other local governments.
The municipal-bond market had anticipated that top-rated state and local governments would be cut after the U.S. downgrade, being unlikely to maintain higher credit profiles than the federal government on which states depend for much of their funding. "Municipals in the USA have never had to consider a sovereign [rating] ceiling before," wrote analysts at Bank of America Merrill Lynch.
Instead, S&P said late Monday that it may still allow triple-A ratings for some state and local governments, one notch higher than the double-A-plus rating it now assigns to federal government debt.
"We do not directly link our ratings on U.S. state and local governments to that of the U.S. sovereign debt rating," S&P said in a report. S&P said it expects many such governments, particularly those that are relatively less dependent on federal government funding, could keep higher ratings than the U.S. government.
In order for states to be rated higher than the federal government, S&P said they must demonstrate three characteristics:
• the ability to maintain stronger credit characteristics than the U.S. government in a stress scenario,
• a predictable institutional framework that is likely to limit the risk of a reduction in federal benefits,
• and the projected ability to mitigate such a reduction by a high degree of financial flexibility and independent treasury management.
Muni analysts had said the U.S. rating downgrade will most directly affect municipal credits tied closely to U.S. government debt securities, such as pre-refunded bonds backed by escrowed Treasury bonds and agency-backed municipal debt. Other muni bonds likely to see their ratings move in tandem with the U.S. government include bonds backed by federal leases.
Rating firms will likely place emphasis on macroeconomic sensitivity to the federal government, J.P. Morgan analysts wrote in a note Monday, while Bank of America Merrill Lynch said it would expect states in the South and West to be more affected by the U.S. downgrade due to concentrations there of military and defense operations.
California Treasurer Bill Lockyer on Monday called the downgrade of the U.S. credit rating a statement about the federal government's partisan political gridlock, and said his state needs to be more concerned about the continuing effects of the economic recession on jobs and the stock market.
"We have balanced our state budget this year, we have cut our need for cash borrowing in half since last year, and we have greatly reduced our structural budget deficit problem for the future, so there is no reason to expect adverse ratings for the state," Mr. Lockyer said in a statement.
Last month, rival rating firm Moody's Investors Service suggested moving about 7,000 muni-bond ratings in lockstep with the U.S. credit rating in the event of a downgrade. Moody's also placed five of the 15 states it rates triple-A—Maryland, South Carolina, Tennessee, Virginia and New Mexico—on review for potential downgrade. Moody's hasn't downgraded its Aaa credit rating for the U.S. government.
Some muni analysts said they think the impact of the S&P's federal government downgrade will be muted compared with other market turmoil in recent years.
"I don't believe that the direct impact, number and magnitude of municipal bond downgrades caused by the U.S. bond rating downgrade will be anywhere near as great as the impact of the 'junking' of bond insurance ratings during 2008-009," Richard Larkin, director of credit analysis at Herbert J. Sims & Co., wrote late Monday.
Mr. Larkin noted that during that time, about half of the municipal bond market was downgraded from triple-A ratings, with many issues losing their ratings completely after the insurers reached non-investment grade status.
The municipal-bond market had anticipated that top-rated state and local governments would be cut after the U.S. downgrade, being unlikely to maintain higher credit profiles than the federal government on which states depend for much of their funding. "Municipals in the USA have never had to consider a sovereign [rating] ceiling before," wrote analysts at Bank of America Merrill Lynch.
Instead, S&P said late Monday that it may still allow triple-A ratings for some state and local governments, one notch higher than the double-A-plus rating it now assigns to federal government debt.
"We do not directly link our ratings on U.S. state and local governments to that of the U.S. sovereign debt rating," S&P said in a report. S&P said it expects many such governments, particularly those that are relatively less dependent on federal government funding, could keep higher ratings than the U.S. government.
In order for states to be rated higher than the federal government, S&P said they must demonstrate three characteristics:
• the ability to maintain stronger credit characteristics than the U.S. government in a stress scenario,
• a predictable institutional framework that is likely to limit the risk of a reduction in federal benefits,
• and the projected ability to mitigate such a reduction by a high degree of financial flexibility and independent treasury management.
Muni analysts had said the U.S. rating downgrade will most directly affect municipal credits tied closely to U.S. government debt securities, such as pre-refunded bonds backed by escrowed Treasury bonds and agency-backed municipal debt. Other muni bonds likely to see their ratings move in tandem with the U.S. government include bonds backed by federal leases.
California Treasurer Bill Lockyer on Monday called the downgrade of the U.S. credit rating a statement about the federal government's partisan political gridlock, and said his state needs to be more concerned about the continuing effects of the economic recession on jobs and the stock market.
"We have balanced our state budget this year, we have cut our need for cash borrowing in half since last year, and we have greatly reduced our structural budget deficit problem for the future, so there is no reason to expect adverse ratings for the state," Mr. Lockyer said in a statement.
Last month, rival rating firm Moody's Investors Service suggested moving about 7,000 muni-bond ratings in lockstep with the U.S. credit rating in the event of a downgrade. Moody's also placed five of the 15 states it rates triple-A—Maryland, South Carolina, Tennessee, Virginia and New Mexico—on review for potential downgrade. Moody's hasn't downgraded its Aaa credit rating for the U.S. government.
Some muni analysts said they think the impact of the S&P's federal government downgrade will be muted compared with other market turmoil in recent years.
"I don't believe that the direct impact, number and magnitude of municipal bond downgrades caused by the U.S. bond rating downgrade will be anywhere near as great as the impact of the 'junking' of bond insurance ratings during 2008-009," Richard Larkin, director of credit analysis at Herbert J. Sims & Co., wrote late Monday.
Mr. Larkin noted that during that time, about half of the municipal bond market was downgraded from triple-A ratings, with many issues losing their ratings completely after the insurers reached non-investment grade status.
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