Fitch public finance downgrades outnumber upgrades

WASHINGTON, April 18 Thu Apr 18, 2013 3:45pm EDT

WASHINGTON, April 18 (Reuters) - Fitch Ratings downgraded more public finance debt than it upgraded in the first quarter of 2013 due to cuts to 23 charter schools' ratings, the agency said in a special report on Thursday.

The first quarter saw the most upgrades in more than three years, as the total number of all Fitch's rating changes increased from the fourth quarter of 2012.

"The increase in the number of downgrades is a bit of an anomaly," the credit rating agency said, even though this marked the 17th quarter in a row its public finance downgrades outnumbered upgrades.

Fitch recently changed its criteria for assessing the credit quality of charter schools, which are part of the public education system but operate independently, frequently under the management of a private company.

When Fitch used the new approach, it found that charters schools' "operating history and financial and debt profile are generally speculative grade."

"Fitch noted rapid deterioration in fundamental credit quality for charter school transactions that exacerbated the negative effect of the criteria changes," it said.

"This rapid decline in credit quality illustrates the volatility inherent in most charter school financings and is one factor limiting the ratings for the sector."

Late on March 8, Fitch dropped the ratings of charter schools in 11 states across the country including ones in Houston, Texas, managed by Kipp, Inc, an industry leader. Colorado had the most downgraded schools.

The reasons for the ratings cuts varied slightly. For the schools managed by KIPP, which stands for the Knowledge is Power Program, Fitch cited high leverage. For Enterprise Charter School in Buffalo, New York, Fitch said it was concerned primarily about academic performance.

The agency's consistent concern for many of the schools was a limited "financial cushion." At the time, it said its charter school ratings would likely remain predominantly speculative-grade for the foreseeable future.

When measured by par amount, Puerto Rico accounted for more than half of the ratings cuts in the quarter. Fitch knocked the financially troubled island's debt down by two notches over its massive budget problems and concerns that its debt levels and pension obligations are too high.

On the flip side, a jump in upgrades "was driven by the increase in the number of tax-supported upgrades, which was at its highest level since the fourth quarter of 2009," and began when the agency raised Alaska's rating to 'AAA' from 'AA+' in January, Fitch said.

Alaska's upgrade "reflects the state's maintenance of very substantial and growing reserve balances and the continuation of conservative financial management practices at a time of strong revenue performance," it added.

When measured by par amount, San Francisco had the largest upgrade, it said.

In December the agency said it expected above-average local government downgrades this year as cities and counties continued to confront a clutch of ongoing fiscal problems, including an uneven revenue recovery, spending strains, and pension pressures.

Another major rater, Moody's Investors Service, made similar warnings, saying in February its outlook for local governments remains negative for this year. Last year, Moody's downgraded a record amount of debt due to economic and budget stresses and it anticipates that rate to be slower this year.

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