U.S. court's Puerto Rico bond ruling prompts Fitch ratings warning for other issuers

CHICAGO, April 11 (Reuters) - A U.S. Appeals Court ruling last month in Puerto Rico’s bankruptcy led Fitch Ratings on Thursday to place seven city, school, and health care ratings in states including Illinois and California on a watch list for potential downgrades.

The credit rating agency said the ruling by the Boston-based First Circuit Court “creates uncertainty about full and timely repayment of special revenue obligations during bankruptcy of the related municipality.”

The court determined payments on defaulted Puerto Rico Highways and Transportation Authority Bonds backed by special revenue are voluntary and not mandatory while bankruptcy is ongoing.

The March 26 ruling affirming a U.S. District Court decision surprised the $3.8 trillion U.S. municipal market, which had assumed that special taxes or revenue pledged to pay off bonds would continue to flow to bondholders during Chapter 9 bankruptcies. Fitch said its watch list contains special revenue bond ratings that are more than six notches higher than the issuers’ underlying ratings. The list includes AA-rated Chicago senior lien water revenue bonds, A-rated Chicago Board of Education limited ad valorem tax revenue bonds and AAA-rated dedicated tax general obligation bonds issued by the Sacramento and Oakland school districts in California. If the ruling becomes final, Fitch said the ratings would be downgraded to levels closer to the issuers’ underlying ratings.

Bond insurer Assured Guaranty Corporation, a plaintiff in the Puerto Rico case, this week petitioned the appeals court for a rehearing and said on Thursday it is assessing other options, including appealing the ruling to the U.S. Supreme Court. (Reporting By Karen Pierog; Editing by David Gregorio)