WASHINGTON, March 6 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
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
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
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
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.