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 agency would
apply a "sovereign ceiling" to state ratings, taking the view
that ratings within a country should not be higher than the
rating of the national government.
Another round of negative headlines could rattle retail
investors, who fled the market late last year on 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 examine all
municipal ratings in the context of specific federal funding
cuts, which will not 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, an 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.
The report showed state and local governments should not
rely on the U.S. government for help, said Richard Ciccarone,
managing director at McDonnell Investment Management.
"Where are the Achilles heels if Uncle Sam cuts back?," he
said, pointing to possibly lower fund transfers for Medicaid,
infrastructure and education. "It's the combination of having
their own cash-flow weakness combined with cutbacks in federal
support -- that would be the greatest risk for them."
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.
Indiana over recent years slashed outlays, shrank the size
of government and reduced borrowing, bringing it to its first
top-notch rating, said State Treasurer Richard Mourdock.
"The federal government's been doing exactly the opposite
in all those areas, and there you have it," he said.
S&P said state and local governments considered better
credits than the United States will in most instances have
ratings only one notch above the national rating. Currently
that results in the highest rating possible, but a further U.S.
rating cut could drag those states down, said Chris Mauro, head
of U.S. Municipal Strategy at RBC Capital Markets.
State and local governments should have different ratings
from the U.S. government because "in effect, what you have are
sovereign states within a sovereign state," said Richard
Larkin, senior vice president at Herbert J. Sims & Co, Inc in
Mike Nicholas, chief executive officer of Bond Dealers of
America, the trade association for dealers and banks focused on
U.S. fixed-income markets, agreed.
"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.
After years of cutting spending and raising revenue, Utah's
Salt Lake City should not have its credit-worthiness questioned
"because the federal government and Congress are unable to
address the basic workings of government," said the triple-A
city's mayor, Ralph Becker.
A ratings drop could push up interest on its debt.
"Right now interest rates are favorable, which allows us to
do some important construction projects," said Decker. "A
slight change in interest rates changes what we are able to
RATINGS CLOUD STILL HANGS OVER MUNICIPAL BOND MARKET
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 conference call on Monday. "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 pre-refunded bonds secured by Treasuries
and certain housing debt, were downgraded late on 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 "lock-step" 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
was 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
The actions followed Thursday's move by rival Moody's
Investors Service to slap a negative rating outlook on five
top-rated states and hundreds of local governments it tied to
U.S. debt woes.
Steve Schrager, director of research at SMC Fixed Income
Management, said Tuesday's statement may not reassure
investors, especially individual investors, a significant force
in the municipal bond market, who could be spooked by all of
S&P's recent shifts.
"This has to undermine investors' confidence. But this is
the point: Where do they go? Where do they put the money?" he
said, emphasizing he did not speak on behalf of his firm. "As a
retail investor, your head is spinning right now."
(Reporting by Chip Barnett, Karen Pierog in Chicago and Lisa
Lambert in Washington; Editing by Andrew Hay and Dan Grebler)