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
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
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)