(Recasts, adds details, background, reaction)
NEW YORK Aug 9 Some U.S. states and local
governments may retain their coveted AAA ratings despite the
fact the United States has lost its top rating, according to
Standard & Poor's Ratings Services.
Analysts and traders had been concerned the rating agency
would apply a "sovereign ceiling" to state ratings, the idea
that ratings within a country should not be higher than the
rating of the national government.
Another round of negative muni headlines could rattle
retail investors, who began fleeing the market late last year
on well-publicized predictions of mass bond defaults that have
yet to materialize.
"Pursuant to our criteria, the fiscal autonomy, political
independence, and generally strong credit cultures of U.S.
states and local governments can support ratings above that of
the U.S. sovereign," S&P said in a report released late on
But the rating agency, which downgraded the United States
to AA-plus with a negative outlook on Friday, will be examining
all municipal ratings in the context of specific federal
funding cuts, which won't be known until later this year, an
official said on Tuesday.
"Where are the actual reductions going to be? Where will
they hit and when?," Steve Murphy, a S&P managing director,
told Reuters. For details, click on [nN1E7780JK].
Congress has until year end to find $1.5 trillion in
spending cuts with a bicameral, bipartisan commission charged
with identifying at least $1.2 trillion in savings by Nov. 23.
States, cities and other local debt issuers that have low
dependence on federal funding and that can weather declines in
federal assistance could be rated higher than the United
States, S&P said in its report.
"We expect that in most instances in which state and local
governments have ratings above that of the U.S., the
differential will be limited to one notch," S&P said.
The states that S&P currently rates triple-A are Delaware,
Florida, Georgia, Indiana, Iowa, Maryland, Minnesota, Missouri,
Nebraska, North Carolina, Utah, Virginia and Wyoming.
"S&P's report will probably give a lot of comfort to
municipal professionals that they're not going to have to deal
with downgrades because of a formula," said Richard Larkin,
senior vice president at Herbert J. Sims & Co, Inc. in New
The United States warrants different ratings between the
U.S. government and regional and local governments because "in
effect, what you have are sovereign states within a sovereign
state", Larkin said.
The S&P report also made sense to Mike Nicholas, chief
executive officer of Bond Dealers of America, the trade
association for dealers and banks focused on U.S. fixed-income
"State debt -- GO debt -- is not tied to U.S. Treasuries,
not dependent on the U.S. government as a backstop. It
shouldn't be affected at all," he said.
Not all market players saw it that way.
Chris Mier, a managing director at Loop Capital Markets in
Chicago, said the market may be in for a period of reverse
calibration of muni ratings, which were lifted in recent years
to match rating agencies' global scales.
"If the U.S. government is AA-plus you can't have a half
dozen of states at AAA ratings, or local units at AAA ratings,"
Mier said in a Monday conference call. "Clearly, in order to
keep the system logical and coherent there's going to be a lot
A slew of muni debt directly related to the U.S.
government, including prerefunded bonds secured by Treasuries
and certain housing debt, were downgraded late Monday by S&P to
AA-plus with a negative outlook from AAA.
The rating agency said in July ratings on this debt would
move in "lockstep" with the federal government's rating.
On Monday, S&P stripped top ratings from several local
government investment pools due to exposure to investments in
Treasuries and U.S. government agency securities.
Assured Guaranty Municipal Corp (AGO.N), the only active
insurer of muni bonds, had the outlook on its AA-plus rating
revised to negative from stable. Ratings on muni bonds backed
by federal leases and on about $26.2 billion of bonds issued by
the Tennessee Valley Authority were cut to AA-plus from AAA.
The actions followed a move on Thursday by rival Moody's
Investors Service, which slapped a negative rating outlook on
five top-rated states and hundreds of local governments it had
tied to U.S. debt woes.
(Reporting by Chip Barnett, additional reporting by
Karen Pierog in Chicago and Lisa Lambert in Washington; Editing
by Andrew Hay)