Given the deterioration in local tax bases, it may seem surprising this Moody’s negative outlook for states and municipalities wasn’t issued earlier. However, this is the first time that the rating agency has provided a warning across a class of borrowers. However, despite the grim tone, in fact municipal borrowers (save industrial revenue bonds, in which payments come from a particular project, not a taxing authority) even when they default are much less problematic than corporate borrowers. Historically, they miss a payment or two but do not default on principal. Even if government borrowers in this cycle required more significant restructurings than in the past, they are still likely to perform better than a defaulting corporate borrower,
U.S. local governments were assigned a negative outlook by Moody’s Investors Service, the first time the New York-based credit rating company gave such an assessment to the overall group of debt issuers.
The collapse in housing, turmoil in financial markets and what may become the broadest and deepest national recession since the 1930s will pressure “many if not most local governments” over the next 12 to 18 months, Eric Hoffmann, a Moody’s analyst, said in a news release today.
Moody’s cited “unprecedented fiscal challenges” faced by American counties, cities and school districts after a month when the U.S. unemployment rate jumped to a 25-year high of 8.5 percent. The gauge may reach 10 percent by 2010, the company said, citing some economists’ forecasts.
Investing in local government debt “demands greater attention” to credit analysis than for states, which have more power to balance their budgets and can’t declare bankruptcy, BlackRock Inc. municipal-bond portfolio managers led by Peter Hayes said in a report this month.
“Local governments have a higher risk of default and may declare bankruptcy, but bankruptcies, if any, will be minimal and isolated to mismanaged and weak credits,” BlackRock said…
The localities most at risk of having their Moody’s bond ratings downgraded will be those with: industries such as real estate, auto manufacturing or financial services; reliance on falling revenue sources such as sales and real-estate transfer taxes; volatile variable-rate debt; and a high proportion of fixed or legally mandated costs, according to today’s report.