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California stares at possible ratings downgrade

June 19, 2009

It was only a matter of time before another ratings agency weighed in to warn that California could see its rating slashed if it doesn’t get its fiscal house in order soon. Moody’s Investors Service said that the state’s rating could be put on the chopping block for multiple downgrades.

It’s unlikely that California, among the biggest issuers of municipal debt, would be shut out of credit markets should its ratings slide further, but it would face steeper financing costs at a time when it’s running out of precious cash.

Reuters reports that risk premiums on California’s general obligation bonds have risen 92BPs since May 1, outpacing the 41BP rise in the Municipal Market Data triple-A benchmark scale. Brown Brothers Harriman notes that the state’s Build America Bonds – the taxable bonds that are subsidized under the Obama stimulus plan – are also suffering.  On Thursday, the BABs risk premiums stood at around 380BPs over Treasurys, or about 15BPs wider than where they were first issued in April.

From Reuters:

The rating agency rates California at A2, or its sixth-highest investment grade.

The action reflects an expected budget gap for fiscal 2010 of more than $20 billion, or more than 20 percent of the general fund budget; the announcements by the state controller that without solutions California will not be able to meet all its financial obligations in July; a continued political stalemate, and the limited options available to the state, Moody’s said.

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