June 22, 2012 / 7:46 PM / 7 years ago

Moody's downgrades $64 billion of U.S. muni debt

NEW YORK/MIAMI (Reuters) - Moody’s Investors Service on Friday cut ratings on $64 billion of municipal bonds, including debt owed by 1,675 local and state governments, because the obligations rely on 15 global banks the Wall Street credit agency sees as less steady.

Moody’s on Thursday downgraded big banks such as Citigroup that provided “letters of credit, standby bond purchase agreements, and other liquidity facilities” backing $45 billion of tax-free debt.

Separately, Moody’s said it was also reducing ratings on $19 billion of pre-paid natural gas bonds issued by 24 utilities in Tennessee, Kentucky, Texas and elsewhere because the downgraded banks support certain payment obligations on the bonds.

Moody’s cut the credit ratings of 15 of the world’s leading banks by one to three notches to reflect rising risks of losses they face in volatile capital markets.

Such ratings cuts typically hurt prices of outstanding bonds and raise interest rate costs for issuers, but they had little effect on Friday on muni bond prices.

The lion’s share of the state and local government debt downgrades - 1,163 - hit obligations that were rated solely on the support provided by the downgraded banks.

The short-term ratings of 152 U.S. municipal obligations that were rated based on standby bond purchase agreements and other third party supports also were cut.

Also downgraded were short-term ratings of 137 series of tender option bonds that relied on third party facilities. Tender option bonds typically have floating rates and carry a promise that the holder can sell the security at certain times.

The long-term ratings of 40 series of tender option bonds were cut if their underlying asset was a custodial receipt whose rating depends on support from one of the 15 banks.

Some 223 public finance sector obligations supported by letters of credit were downgraded because their long-term ratings were based on a joint default analysis, Moody’s said.

The agency said the downgrades of the two dozen issues of gas prepayment bonds, a form of debt public utilities use to lock in discounted supplies of fuel, were also knock-on actions from Thursday’s rating cuts.

Citigroup, Goldman Sachs Group, Inc, Credit Agricole Corporate & Investment Bank, JPMorgan Chase, Morgan Stanley, Royal Bank of Canada and Societe Generale were among the banks downgraded, Moody’s said.

In addition, Moody’s said it expected the bank downgrades to have relatively little effect on long-term bond ratings of variable-rate securities issued by U.S. cities, states and counties.

About 500 municipal issuers, including about 250 local governments, have outstanding variable-rate demand bonds that are supported by letters of credit or standby bond purchase agreements with banks, but the ratings of fewer than 5 percent may be affected, Moody’s said in a statement.

“Those ratings will be placed under review for possible downgrade over the next few weeks. Moody’s does not expect to place any state government ratings under review,” the rating agency said.

Reporting by Joan Gralla, additional reporting by Michael Connor; Editing by Chizu Nomiyama, G Crosse and Dan Grebler

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