One NYC bond series now "AAA" though Depfa backs it

NEW YORK, Nov 7 (Reuters) - One series of New York City floating rate bonds was raised to "AAA" by Moody's Investors Service because the debt is also backed by Depfa Bank [DEPF.UL], even though the bank could be downgraded, the credit agency said on Friday.

New York City, like many other cities, states, agencies and the like, has had to pay high interest rates on variable rate demand notes after demand withered amid fears about the financial strength of the banks that backed the debt.

The upgrade by Moody's from "A2/VMIG 1" should help lower the interest rates the city pays -- though both the city and Depfa have lower ratings.

Moody's in a statement said it gave the upgrade because the city and the bank are not likely to default at the same time.

Yet financial analysts noted the credit crunch that began with Wall Street's binge borrowing has boomeranged around the world, and poses an exceptional hazard to New York City because its economy depends so heavily on the securities industry.

New York state's Metropolitan Transportation Authority also won an upgrade to "AAA/A-1" from "A" from Standard & Poor's Ratings Services for a series of variable rate paper issued in 2005 that is backed with a letter of credit from Landesbank Hessen Thueringen Girozentrale [LHTGL.UL].

The upgrades for both the New York City paper and the debt sold by the Metropolitan Transportation Authority were granted even though both the city, the mass transit agency, and the two banks are all rated lower than "AAA."

New York City had asked Moody's to review the documents for its deal, which dates back to 1995, one year before the credit agency began taking both the strength of the issuer and the letter of credit provider into account in such ratings.

Moody's kept the underlying rating for the debt at "Aa3," which is three notches below "AAA." Depfa Bank, however, is currently rated A2, five notches below the highest rating, and "P-1" for its short-term and long-term obligations. And Moody's has said both of the bank ratings might be cut.

Similarly, Standard & Poor's upgraded a series of debt sold by the Metropolitan Transportation Authority because the nation's biggest mass transit agency is not likely to default at the same times as the bank backing the debt, Landesbank Hessen Thueringen Girozentrale.

This credit agency based its upgrade on another factor that underscores how far some financial institutions, whose creditworthiness was almost taken for granted, have fallen.

The short-term rating is pinned on the letter of credit provider's short-term rating, the credit agency said, "following the release and discharge of the bond insurance policy that CIFG Assurance North America Inc.. provided."

CIFG, a bond insurer, now is rated non-investment grade at "B" by Standard and Poor's, which has warned it might be downgraded.

The freezing of the short-term credit markets, one more victim of the worldwide credit crunch, confounded muni experts who had believed it was highly unlikely that states, cities, hospitals and the like that sold floating rate paper would ever have to pay the high penalty rates if no buyers could be found.

Standard & Poor's noted that for the Metropolitan Authority's issue: "The initial Letter of Credit provides for 46 days of interest at the 12 percent maximum rate." (Reporting by Joan Gralla, Editing by Andrea Ricci)