“Most U.S. municipal entities do not depend on market access for their most critical funding requirements,” said Moody’s Managing Director Timothy Blake in a press release on Wednesday. He was the author of the report, which updates a January report on the same topic. “Municipal debt is generally long-term and amortizing; and typically does not externally finance operating deficits.”
Market volatility could emerge due to events within the municipal sector, from the global sovereign or banking sectors, or because of global developments of a political nature, says the Moody’s report.
Municipal issuers identified by Moody’s that may have greater exposure include state and local governments that rely on debt issuance to fund operating deficits, and governments that rely on short-term notes to finance seasonal cash flow needs. Others include issuers that need to roll over bond anticipation notes issued for interim construction financing, or bonds incorporating mandatory puts.
Issuers seeking to convert outstanding variable rate demand securities or commercial paper to a fixed-rate mode due to expiring credit or liquidity support could also be vulnerable along with those that rely on the timely liquidation of money-market securities to repurchase commercial paper and puttable debt securities.
Even the vast majority of these municipalities could manage through a turbulent period without facing a severe deterioration in their credit. While downgrades could happen more frequently in an environment of diminished market access and tight liquidity, Moody’s would not expect widespread multi-notch downgrades, downgrades below investment grade, or defaults.
“As demonstrated in the 2008-09 crisis, issuers can utilize a number of strategies at such a time,” said Blake. “These would include issuing debt on less-favorable terms, drawing down their own internal funds, securing direct bank loans, or seeking other alternatives to market financing.”
However, an exact repetition of these tactics will be unlikely, Blake explained, because tax revenues and balanced sheets have still not fully recovered to 2007 levels.
“Most municipal issuers are somewhat weaker than they were prior to the last major market disruption,” said Blake. “This is why some may face significant stress if hostile market conditions emerge.”
The report, “Most U.S. Municipal Issuers Well-Insulated from Volatility of Capital Markets,” is available at moodys.com.