Feb 21 Moody's Investors Service is
sweeping a magnifying glass over thousands of U.S. municipal
sector obligations that are linked to 26 banks currently under
review for possible credit rating downgrades, it said on
The Wall Street rating agency said it is looking
at the ratings of debt sold by states, cities, hospitals
and others that are based solely on support provided by
banks under review, and also at the short-term ratings of
obligations with standby bond purchase agreements and similar
facilities from the banks.
At the same time, Moody's said it is considering
downgrading the short-term ratings of tender option bonds -
where a bondholder can put the bond back to the issuer - and
long and short-term ratings based on a joint default analysis.
The last group - when Moody's calculates the
default dependence between the bank and issuer - will touch 345
The news could cause worry in the $3.7 trillion
municipal bond market, where issuers have for the most part been
successfully extending or replacing letters of credit and other
expiring facilities backing their debt.
A bubble in bank letters of credit developed when the
auction-rate securities market collapsed and issuers moved their
money into variable-rate bonds, which need the facilities to
serve as lines of credit during remarketing.
Many facilities provided during the financial crisis of
2007-08 expired last year, affecting approximately $130 billion
of variable-rate bonds and issuers began turning to
U.S. banks as concerns grew over financial
problems in Europe.
When Belgian-French financial group Dexia's credit
worsened last fall and issuers faced higher borrowing costs for
Dexia-supported debt, they replaced their backstops with support
from other banks or let the facilities expire. Dexia, meanwhile,
stopped selling support.
Now, though, the creditworthiness of other banks is being
called into question. On Thursday, Moody's warned it may cut the
credit ratings of 17 global and 114 European financial
institutions from the fallout of the euro zone government debt
crisis. It said Bank Of America might be downgraded one
In the public finance review it announced on Tuesday, Bank
of America figures heavily, mostly because it provides a large
share of credit and liquidity facilities.
Moody's is reviewing roughly 500 obligations where the
rating was wholly based on support provided by BofA,
including a long list of District of Columbia variable-rate
bonds and revenue and general obligation bonds sold by New York
City and its finance authorities and agencies.
The rating agency said it is also reviewing the ratings of
another roughly 500 tender option bonds backed by the
bank . These include variable and inverse rate certificates
and puttable floating option tax-exempt receipts. Frequently,
tender option bonds are deposited into trusts that issue
floating rate securities and inverse floater securities.
Moody's said it is also looking at more than 350 obligations
where the ratings are based solely on support provided by
JPMorgan, with a heavy emphasis on finance authorities and
health, housing and educational agencies in Illinois and New
According to Thomson Reuters data, JPMorgan was the second
largest provider of domestic letters of credit for new debt in
2011, representing a 20 percent market share. Citibank was the
top seller of new letters that year.
Support provided by German banks such as Landesbank
Hessen-Thueringen, are also triggering the Moody's reviews for
Meanwhile, the nearly 300 tender option bonds not linked to
Bank of America under review are supported by BNP Paribas
, Citibank, Deutsche Bank, Morgan
Stanley Bank, Rabobank Nederland, and Royal Bank of Canada.