Despite the recent economic downturn, the vast majority of public finance ratings have remained stable, according to a newly issued report by Moody’s Investors Service.
Of the 18,000 municipal issues rated by Moody’s, ratings for fewer than 6% changed in either direction since the beginning of 2010. Although the downturn began in late 2008, economic and financial information from that period was first reported in early 2010.
Moody’s findings confirm what many in the municipal bond industry already knew: municipal bonds remain one of the most secure investment sectors.
Vast majority of bonds have been paid
Although cities and states have struggled to balance their budgets amid the specter of layoffs and program cuts, an overwhelming number of bonds have been paid. Nevertheless, financial and economic pressures have resulted in more downgrades than upgrades, according to Moody’s, a trend that is expected to continue.
Yet, while the trend is negative, it is restricted to a limited number of credits, and the downgrades that have occurred have mostly been one notch in nature. In fact, Moody’s notes, “there have been no large multi-notch downgrades at the state level…at the local level…only 22 counties, cities and school districts experienced multi-notch downgrades.”
Downgrades have tended to be focused on housing and multi-family affordable housing issues, where the effect of poor rental markets was greatly felt. General government issuers at the local level that suffered downgrades tended to rely on economically sensitive industries, such as gambling. Atlantic City was downgraded from A1 to Baa1.
Governments remain current on debt service
Although declining revenues and dependence on an undiversified revenue base have caused a number of downgrades, cities and other local entities remained current on their debt service, even if at a lower bond rating level. Clearly the wave of defaults predicted by some has not happened and is unlikely to occur despite a weak economy. Localities still possess the ability to manage their resources in ways that ensure core services are delivered and debt service is paid.
While this recession has been severe, it is by no means the only recession bond issuers have experienced, and unlikely to be the last one. Nevertheless, the resourcefulness of America’s local governments and non-profit sectors continues to provide a safe haven for investors. Moody’s report is a testament to the fact that the credit quality of municipal bond issuers remains strong.