CHICAGO | Di 26 april 2011 3: 36 pm EDT
CHICAGO (Reuters)-States and local governments are facing their toughest year until now, such as rating downgrades continue to outnumber upgrades, Moody's Investors Service said Tuesday.
The first quarter of 2011 marked the ninth consecutive quarter in which downgrades dominated, according to the rating agency.
"With negative Outlook assigned to all the major municipal sectors, the trend is likely to rank for all 2011," said Conor McEachern, a Moody's Assistant Vice President, in a statement.
There were 66 downgrades and 17 upgrades in the first three months of 2011 for a ratio of 3.9 to 1--the second highest since the first quarter of 2002 and higher than the full year 2010 ratio of 2.2 to 1Moody's reported.
In particular, the ratings for Nevada and Kentucky dropped to Aa2 from Aa1, while Providence, Rhode Island, was downgraded to A3 from A1.
McEachern said States and school districts this year will be faced with "weak revenue growth, considerable expenditure obligations and the loss of federal stimulus money."
Meanwhile, cities and other local municipalities will have to do with cuts in State aid, dropping property values and reduced budget options, he added.
Other sectors of the municipal market of 2.9 trillion also sees ratings pressure, including nonprofit hospitals, private universities and airports, according to the rating agency.
Recent developments are of limited importance, said for buy-and-hold investors, Fred Yosca, manager of underwriting and trading on BNY Mellon Capital Markets.
"In terms of whether you are going to get 100 cents back on your dollar in maturity, I think, as long as you buy it from fairly good credits, which is pretty easy to do in the municipal forum, you're fine," said Yosca.
"If you're a total-return investor, I think you should be more sensitive to considerations credit because you sell at a time when it is not opportune to sell from the perspective of credit," he said.
Richard Ciccarone, managing director and chief research officer at McDonnell Investment Management, said he expects credit pressure to continue for years, "at least two and possibly four" anymore. But he said that the recession has caused some issuers to improve the management and disposal of waste, which is good for performance by character.
"The majority of the credits, I would expect, sees a stabilisation of the credit quality. The minority would see things getting weaker, "he said.
(Additional reporting by Edith Honan in New York; Edit by Padraic Cassidy)
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