Muniland likely resilient to U.S. downgrade

August 8, 2011

It’s a little frustrating to hear commentators outside of muniland bash all municipal bonds as though they were a homogenous asset class. AOL’s Daily Finance ran a quote from the top regulator at the Municipal Securities Rulemaking Board, who is pushing back on this idea:

“It is important to remember that only four to six [defaults] make headlines, but 45,000 others are doing OK,” Lynnette Kelly Hotchkiss, executive director of the Municipal Securities Regulation Board, tells DailyFinance. “Remember that every issuer is unique and needs to be analyzed on its own merit.”

Reuters is running with the meme that the municipal bond market will likely be resilient in the face of Standard & Poor’s downgrade of the United States. Bloomberg is sailing in the opposite direction with a gloomy view of the prospect of downgrades for munis after S&P’s action. The Bond Buyer reports that low expected issuance should help buoy yields. And the Wall Street Journal details how muniland has passed a critical threshhold in the second quarter as municipalities were able to renew and renegotiate their bank backstop agreements:

The municipal-bond market passed a critical test in the second quarter, as states, cities and other municipal issuers readily replaced billions of dollars of expiring credit agreements with banks.

In the three-month period, Moody’s Investors Service Inc. said the vast majority of municipal issuers renewed, replaced or refinanced most of the $26 billion of expiring letter-of-credit agreements and other backstops that the ratings firm tracks.

According to Moody’s, about three quarters of the expiring credit agreements backing variable-rate bonds were either renewed or replaced by a different bank.

The real story is the long-term flow of funds

Standard & Poor’s will likely downgrade thousands of municpal bonds that are linked to the U.S. government today. This won’t pose much of a problem for these credits, except to raise their borrowing cost slightly. But the real story for muniland is how much federal funding to state and local governments will be cut in deficit-reduction talks. From the Bond Buyer:

Longer term, state and local governments are likely to see less funding from the federal government as Washington struggles to get its fiscal house in order. What happens to state and local government bond ratings will depend to a large degree on how they manage with less federal funding.

I posted a table, pie chart and link to the federal grants to state governments in muniland. This will be increasingly important as the federal pie shrinks and the effects flow through to the states.

California budget assaulted in all sides

The Sacramento Bee reports:

As has been the case in recent lean budget years, groups that lose in the annual Capitol budget fight are not walking away quietly. For them, the governor’s signature signals a shift in venue rather than the final word.

Brown, a Democrat, has claimed credit for reducing the state’s recurring budget deficit down to roughly $3 billion next year. But legal and federal challenges, if successful, could more than double that gap.

Advocates say the governor and lawmakers are to blame for solving the state budget with solutions that are illegal. Doing so, they say, allows the state to meet its balanced budget requirement on paper and borrow money from Wall Street, while pushing some of the deficit into next year.

Twitter Talk

@MillerTabakU.S.Treasuries not responding like you thought after losing its AAA rating? investors understand the “bill” has come due = slower growth

@MillerTabak: Austerity has been embraced by municipal issuers to a large degree (see drop in supply) – Uncle Sam is next on the podium – deflation coming

@cate_long: Standard and Poor’s should pay for this enormous mistake by making the CUSIP system open source and freeing the info in this market.

@munilass: “In the muni market … the notion of the federal government as a backstop has been pretty largely discounted.”

@munilassExpiring letters of credit / liquidity facilities for variable rate munis continues not to pose many problems for borrowers. (Bloomberg)

@UtahPolicy: Utah Weighs Big Changes to State Medicaid Program: Blogger Sarah Kliff looks at the efforts of Utah and o…

Good links

MSRB: MSRB Advises Dealers on Certain Obligations in Light of Potential Municipal Rating Actions

IFR: Debt ceiling debate spooked retail buyers of fixed income

Institutional Investor:Can CalPERS and CalSTRS Continue Their Recent Big Returns?

Bloomberg: Alabama Official Who Took Sewer Bribes Loses Appeal as Bankruptcy Looms

The Guardian: Central Falls bankruptcy means a grim present for the ‘city with a bright future’

Reuters: Bankrupt Rhode Island city may default: S&P

New York Times: Hugh Carey, Who Led Fiscal Rescue of New York City, Is Dead at 92

Columbus Dispatch: Casino-tax money may help keep Jackets here

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