Variable-rate bond market will continue to shrink-Moody's

WASHINGTON, March 6 Wed Mar 6, 2013 10:33am EST

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WASHINGTON, March 6 (Reuters) - The variable-rate municipal bond market will continue to shrink this year, but at a much slower pace than in the past, Moody's Investors Service said on Wednesday.

During 2012, the outstanding balance of variable-rate debt dropped 12 percent to $264 billion, Moody's said, as issuers locked in low interest rates by selling new bonds as fixed-rate and refinanced their variable-rate debt into fixed-rate bonds, bank loans or variable-rate bonds linked to an index.

Last year's rate of decline was much slower than in 2011, when the amount of outstanding variable-rate bonds dropped 19 percent, and the rate of decline will likely continue falling as fewer issuers convert their debt to fixed-rate, Moody's said. Also, regulatory changes may improve the conditions for support facilities.

Many bank facilities that provide support for the obligations are expiring in the next year, and banks had been considering not renewing the commitments, given the capital requirements under the Basel III regulatory regime.

"The recent easing of Basel III liquidity coverage requirements, which we expect to positively affect banks' appetite to write letters of credit and standby bond purchase agreements in support of variable-rate debt bonds and the pricing of such facilities, will also contribute to stabilization," Tom Jacobs, Moody's vice president, said in a statement.

Issuers use the facilities as lines of credit if remarketing of the debt, usually on a weekly basis, fails to find new borrowers. A failed remarketing and draw on a facility can result in elevated interest costs. In 2012, the rating agency downgraded many credit and liquidity support providers, including the largest, Bank of America Corp and Citibank.

Even though that pushed down the ratings on variable-rate bonds as well, Moody's said market access was available to issuers whose support facilities expired. Virtually all expired facilities were extended or substituted, or the bonds were refinanced or converted to bank loans.

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