UPDATE 1-TOBs drive up volume of muni variable rate ratings

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NEW YORK Jan 18 (Reuters) - Demand from tender-option-bond programs during a volatile period helped trigger a big spike in demand for municipal variable rate debt ratings, Standard & Poor's Ratings Services said on Friday,

In the 2007 fourth quarter, the credit agency said it rated more such debt in the secondary market than in any previous year since it started this program in 1993.

The variable rate debt is issued by third parties, including tender-option-bond programs or trusts, that securitize municipal bonds.

Since the massive reevaluation of credit risk that began last August, the U.S. municipal market has seen waves of selling by tender-option-bond programs.

Muni traders fear billions more dollars of tax-free bonds will hit the market if more of these programs close positions due to fears that a bond insurer will lose the top "AAA" rating.

"The volatility resulted in ratings activity, as many trusts were terminated and their underlying assets were deposited into new trusts," said credit analyst Jeffrey Previdi in a statement.

"Also, sponsors responded to investor anxieties by having trusts re-rated; a direct result of the ratings volatility experienced by sponsor financial institutions and monoline bond insurers."

(Reporting by Joan Gralla, Editing by Chizu Nomiyama)