–Liquidity Management To Be Key This Year
–Unrated Land-Backed Bonds The Most At Risk

By Yali N’Diaye

WASHINGTON (MNI) – Standard & Poor’s Monday said it does not expect
any “notable increase in defaults among our rated issuers,” despite the
budget woes of state and local governments that will force them to
better manage their liquidity and pay greater attention to bond market
conditions.

Certainly, Standards & Poor’s said it expects downgrades of state
and local governments to rise in 2011.

However, the firm refrained from any dire forecasts, anticipating
that most of the municipalities will keep their medium to high
investment grade ratings.

Besides, despite recent headlines, “fiscal pressure does not
necessarily imperil debt payment,” Standard & Poor’s said. In fact the
ratings agency expects most governments to make the necessary difficult
choices to preserve funding for key programs, their credit rating as
well as their market access.

“We believe that continued revenue decreases for state and local
government may increase fiscal strain on budgets, and monitoring of
liquidity will be especially important in 2011,” analyst Gabriel Petek
wrote in a report titled ‘Outlook: U.S. State And Local Governments Must
Navigate Turbulent Conditions To Maintain Credit Stability.’

Against this backdrop, state and local governments will not only
have to pay increased attention to liquidity management and take
difficult budget decisions, but will also have “pay increasing heed to
bond market conditions and pension costs.”

“Municipal bond market volatility may increase in 2011, creating a
more difficult interest rate environment,” Standard & Poor’s said.

That said, the agency underlined the diversity in the municipal
bond market that “defies easy generalization.”

Standard & Poor’s rates 17,500 muni issuers, noting that the
smallest issuers tend to not request a rating.

As a result of this self selection, “the universe of rated
municipalities is, as a general proposition, more creditworthy and, of
course, less likely to default.”

In addition, Standard & Poor’s expects most “general obligation and
other types of direct debts of state and local governments we rate will
continue to be retired as scheduled. These debt types frequently hold a
legally advantaged status compared to other obligations of these
governments.”

Muni market experts have said that revenue bonds are the ones that
are more exposed to default.

Here too, however, Standard & Poor’s analysis yielded a more
positive outlook: “In general, we have observed that the issuers of
these essential service revenue bonds typically enjoy a strong market
position,” the authors wrote. “In addition, revenue bond issuers often
have strong rate-raising authority, enhancing repayment capacity.”

The agency estimates that the higher rates of distress may remain
among unrated bonds backed by “incomplete property developments.”

In a report titled ‘Navigating a Risk-Laden Recovery,’ Fitch agrees
that “In the U.S., local and state governments are currently
experiencing financial stress at a level not seen for decades.”

“However, Fitch believes that, as a class of debt, municipal
tax-backed credit remains resilient and that while the incidence of
default may increase from very low historical levels, defaults will
continue to be isolated situations.”

** Market News International Washington Bureau: 202-371-2121 **

[TOPICS: MR$$$$,M$U$$$,MFU$$$]