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Global Credit Research - 29 Jun 2011
Report is not an update on the likelihood of a rating action on the U.S. sovereign
New York, June 29, 2011 -- Ratings that are directly linked to the U.S. government's
rating would move in lock-step with any U.S. sovereign
rating action, says Moody's Investors Service in a new report.
Some Aaa ratings of state and local governments could be vulnerable to
credit pressure where sovereign credit linkages are potentially strong.
However, the creditworthiness of U.S. corporates and
financial institutions with Aaa stand-alone credit ratings and
Aaa (sf)-rated structured finance transactions that lack any direct
credit linkage to the sovereign would generally be resilient to a one-
or a two-notch downgrade of the U.S. government.
On June 2, Moody's said it expected to place the U.S.
government's Aaa rating on review for possible downgrade,
if there were no progress on increasing the statutory debt limit by mid-July.
If a debt-ceiling related default were to occur, Moody's
would likely downgrade the U.S. sovereign rating.
A rating in the Aa range would be the most likely outcome.
"There is a large amount of debt issued with strong credit linkages
to the credit quality of the U.S. government,"
says Moody's. "Therefore, we are detailing the
potential rating implications of a U.S. downgrade for other
Aaa-rated U.S. credits, without commenting
on the likelihood of a rating action on the U.S. sovereign."
Ratings directly linked to the U.S. government would move
in lock-step with the any sovereign rating action. These
ratings include those on Aaa-rated bonds issued by banks and others
guaranteed by the U.S. government. It also includes
Fannie Mae, Freddie Mac, the Federal Home Loan Banks and Federal
Farm Credit Banks whose own Aaa ratings are based on support from the
U.S. government. The ratings on municipal supported
transactions, pre-refunded municipal bonds, and structured
securities that hold government linked debt as their primary collateral
would also move in lock-step with the sovereign rating.
The Aaa ratings on U.S. companies, financial institutions,
and the Aaa (sf) ratings on structured finance transactions not directly
linked to the U.S. sovereign rating would generally be resilient
to a one- or a two-notch sovereign downgrade because the
credit linkages to the U.S. government are sufficiently
weak. Some Aaa-rated states and local governments,
however, may be more vulnerable to credit pressure under the circumstances
that would lead to a sovereign downgrade and in turn more vulnerable to
rating actions, says Moody's. Moody's will issue
additional research providing more detail on the impact of a U.S.
sovereign rating action on issuers in the U.S. municipal
bond sector in the coming weeks.
For more information, please see the Moody's Special Comment
"Implications of a U.S. Rating Action for other Aaa
Issuers," available on Moodys.com.
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Anne Van Praagh
MD - CCO
Moody's Investors Service, Inc.
Global Chief Credit Officer
Moody's Investors Service, Inc.
Moody's Investors Service, Inc.
Moody's: Ratings linked to U.S. Government would move in the event of a U.S. rating action
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