States and local governments are facing their toughest year so far, as rating downgrades continue to outpace upgrades, Moody's Investors Service said on Tuesday.
The first quarter of 2011 marked the ninth consecutive quarter in which downgrades dominated, according to the rating agency.
With negative outlooks assigned to all major municipal sectors, the trend is likely to prevail for all of 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 1, Moody's reported.
Most notably, the ratings for Nevada and Kentucky fell to Aa2 from Aa1, while Providence, Rhode Island, was downgraded to A3 from A1.
McEachern said states and school districts this year will be facing weak revenue growth, significant spending obligations and the loss of federal stimulus funding.
Meanwhile, cities and other local municipalities will have to deal with cuts in state aid, dropping property values and diminished budget options, he added.
Other sectors of the $2.9 trillion municipal market will also see ratings pressure, including nonprofit hospitals, private universities, and airports, according to the rating agency.
For buy-and-hold investors, recent developments are of limited importance, said Fred Yosca, manager of underwriting and trading at BNY Mellon Capital Markets.
In terms of whether you're going to get 100 cents back on your dollar in maturity, I think as long as you're buying reasonably 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 guess you've got to be more sensitive to credit considerations because you might want to sell at a time it's not opportune to sell from a credit standpoint, he said.
Richard Ciccarone, managing director and chief research officer at McDonnell Investment Management, said he expects credit pressure to continue for at least two, and possibly four more years. But he said the recession has caused some issuers to improve management and discard waste, which bodes well for performance.
The majority of credits, I would expect, will see a stabilization of credit quality. The minority would see things getting weaker, he said.
(Additional reporting by Edith Honan in New York; Editing by Padraic Cassidy)