CHICAGO May 9 An expected flood of expirations of liquidity facilities on U.S. municipal debt this year is so far going well, Moody's Investors Service reported on Monday.
However, it warned that the peak expiration months for letters of credit and other liquidity facilities used to support variable-rate debt lie ahead.
A successful resolution would be a credit positive for the market, which has seen rating downgrades outpace upgrades for nine consecutive quarters, Moody's added.
Moody's said a review of 277 expirations in the first quarter of 2011 affecting bonds it rates found that about 85 percent of the facilities' expiration dates were extended by the bank provider or a facility was obtained from a new provider.
Most of the remaining issuers refunded the debt or redeemed the bonds using their own liquidity, while only two issuers had their facilities expire without an alternative in place, according to the rating agency.
"Although issuers with weaker credit may have fewer options, the first quarter's track record indicates that the orderly resolution of bank facility expirations is likely to continue through the expiration bubble over the balance of the year," Moody's said.
About $130 billion of letters of credit and standby bond purchase agreements, representing more than a third of the $380 billion variable-rate demand bond market, expire this year with another $94 billion up in 2012, according to the rating agency.
Rising costs of the facilities in the wake of the 2008 credit crunch have been a concern for the $2.9 trillion municipal bond market.
Many states, cities, schools, hospitals and other municipal bond issuers were trapped a few years ago in a frozen auction-rate market when they could not obtain or afford the facilities to refund that debt into a variable-rate mode. Other refunding attempts succeeded with issuers obtaining three-year liquidity agreements that expire this year, leading to the expected glut of expirations.
In the meantime, banks have tightened their credit policies, while banking regulations from the international Basel III accords affecting capital and liquidity that are expected to take affect in 2015 are paring the ranks of providers and will likely hike costs further.
In cases where issuers are unable to replace expiring facilities, the bank generally buys the bonds with the issuer facing an accelerated repayment schedule.
Moody's said that U.S.-based banks remained the dominant providers of the facilities in the first quarter.
It also warned that the average duration of most new liquidity facilities is less than two years, possibly leading to another expiration peak in 2013 and 2014. (Editing by James Dalgleish)