Fitch Ratings-New York-22 April 2009: Fitch Ratings notes a significantly negative trend in U.S. Public Finance rating actions during the first quarter of 2009 (1Q'09), accelerating a decline in municipal credit from 2008. This deterioration reflects the severe recessionary macro-economic environment, dislocations in the credit markets, and increased fiscal and liquidity pressures.
In the 1Q'09, Fitch's U.S. Public Finance group upgraded underlying ratings on only 40 credits totaling $12.9 billion in par value, while it downgraded underlying ratings on 56 credits totaling $84.2 billion. This resulted in an upgrade-to-downgrade ratio of only 0.71:1 in terms of rating changes and a ratio of 0.15:1 on a par value basis. This was considerably worse than the annual ratios for 2007 and 2008, which were 3.67:1 in terms of rating changes and 8.6:1 in terms of par value and 1.59:1 in terms of rating changes and 5.13:1 in terms of par value, respectively. Fitch notes also that last quarter saw the largest number of Fitch U.S. Public Finance rating downgrades since at least 2002, when Fitch began reporting quarterly municipal rating change totals. The number of downgrades in the last quarter was nearly two-thirds of the total number of downgrades in all of 2008 and greater than the total number of downgrades in all of 2007.
The bulk of the par value in downgrades was attributable to the state of California, whose $51.4 billion in general obligation (GO) bonds were downgraded to 'A' from 'A+'; $8.9 billion in lease-supported bonds were downgraded to 'A-' from 'A'; and $8.7 billion in special tax bonds were downgraded to 'A' from 'A+' (California's special tax bonds were downgraded previously during the 1Q'09 from 'AA-'). Other significant downgrades were the Florida Department of Environmental Protection's $2.6 billion Florida Forever and Preservation 2000 bonds and $200 million Florida Everglades bonds (downgraded to 'A-' from 'A+'); Tennessee Energy Acquisition Corporation's $2 billion gas prepaid revenue bonds (downgraded to 'A+' from 'AA-' following Fitch's downgrade of Goldman Sachs Group to 'A+' from 'AA-'); and various bonds issued on behalf of Detroit, Michigan (the city) including $1.5 billion Detroit Retirement System's Funding Trust certificates of participation (downgraded to 'BB' from 'BBB'), the city's $530 million unlimited tax GO bonds (downgraded to 'BB' from 'BB+'), and the city's $314 million limited tax GO bonds (downgraded to 'BB-' from 'BB'). The largest upgrades on a par basis were for Energy Northwest, WA's $6.6 billion electric revenue bonds (upgraded to 'AA' from 'AA-'), and the Frisco Independent School District's $1.1 billion unlimited tax general obligation bonds (upgraded to 'A+' from 'A').
During the 1Q'09, there were 20 upgrades and 29 downgrades in the tax-backed sector, four upgrades and eight downgrades in healthcare, six upgrades and seven downgrades in water & sewer, three upgrades and five downgrades in public power, no upgrades and four downgrades in transportation, and four upgrades and no downgrades in tax-exempt housing.
The ratio of Positive to Negative Rating Watches and Outlooks indicates the declining trend in public finance ratings is likely to continue for some time. As of the end of the 1Q'09, 44 credits were on Rating Watch Negative, up from 25 credits at the end of the 1Q'08. Five were on Rating Watch Positive at the end of the 1Q'09, down from seven at the end of the 1Q'08. During 1Q'09, six credits were taken off Rating Watch Negative (four of them in conjunction with a downgrade, and one due to a rating withdrawal), while 11 were placed on Rating Watch Negative. Massachusetts Turnpike Authority's Metropolitan Highway System revenue bonds and subordinated revenue bonds were taken off and then placed back on Rating Watch Negative within the 1Q'09.
There were 90 credits with a Positive Rating Outlook and 177 with a Negative Rating Outlook at the end of the 1Q'09, yielding a ratio of 0.51:1, down from 1.08:1 at the end of the 1Q'08; 1Q'09 was the fifth consecutive quarter that this ratio declined.
