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Rating Action:

Moody's downgrades jointly supported LOC-backed U.S. municipal debt; 225 ratings and $15 billion of debt affected

27 Oct 2010

New York, October 27, 2010 -- Moody's Investors Service has downgraded the long-term ratings of 221 letter of credit (LOC)-backed U.S. municipal debt obligations. Of these, 163 were downgraded by one notch, 43 by two notches, and 15 by three notches. Four ratings were confirmed. None of the bonds' short-term ratings were affected. A full list of ratings affected is available on Moody's website at http://v3.moodys.com/viewresearchdoc.aspx?docid=PBM_PBM128434

RATINGS RATIONALE

These rating actions conclude the review initiated on September 1 when Moody's announced an update to its methodology for the way it rates jointly supported LOC-backed debt. The downgrades do not affect the underlying ratings of the affected transactions' obligors and they do not reflect the rating agency's opinion of the obligors' credit quality.

Moody's updated methodology extends the joint default analysis (or JDA) used to rate other sectors to LOC-backed debt. JDA looks at the probability of default of the obligor and of the bank providing the letter of credit, and the default dependence between the two entities. The approach recognizes the potential benefit of dual support and, as such, transactions may achieve a long-term rating that is higher than that of either the obligor or the LOC bank by up to two notches.

The JDA approach is only applicable where a Moody's rated obligor and LOC provider are equally obligated to pay principal and interest when due and the provisions of the transaction document support such structure. As such, the JDA approach is applied to less than 18% of the number of Moody's rated LOC backed transactions in the public finance sector.

The new approach applies Moody's four-year global idealized default rates in the determination of the standalone credit risk of the obligor and the LOC bank. These default rates correspond to both entities' global scale ratings and are consistent with the rates used in applying JDA in other sectors.

The updated methodology also introduces an enhanced framework for determining default dependence. The recent economic cycle has demonstrated the increased interconnectedness between the banking sector and obligors in the U.S. municipal market, particularly those obligors with variable rate debt.

Of the 221 transactions downgraded today, the long-term ratings of 49 transactions will remain under review for further possible downgrade. The current ratings for these transactions reflect the application of the updated methodology. The ongoing reviews are prompted by the fact that the LOC providers or the obligors of the transactions are currently under review for downgrade.

In addition, certain transactions supported by California Public Employees' Retirement System (CalPERS) or California State Teachers' Retirement System (CalSTRS) Credit Enhancement Programs were placed under review on December 10, 2009 ,when those programs were downgraded to Aa3. Moody's undertook a review of the default dependence on state and local California municipal debt transactions that were supported by LOCs provided by CalPERS or CalSTRS. Today's rating actions reflect the conclusion of the review for some of these transactions, as well as the application of the updated JDA methodology.

For transactions with obligors rated below investment grade, in accordance with the methodology, we incorporated additional factors affecting the exposure of these obligors to the banking sector into our assessment of default dependence, beyond the formula calculation used for investment grade obligors.

Today's rating action, along with a previous rating action on September 21 (see press release for more information: http://v3.moodys.com/viewresearchdoc.aspx?docid=PR_206090) and a few transactions that were individually rated in connection with LOC bank substitutions, concludes the review of 898 transactions that were placed under review for downgrade on September 1 when the updated JDA methodology was published. In total, 685 ratings were downgraded by one notch, 144 by two notches and 48 by three notches. The ratings on 5 transactions were confirmed. The number of transactions that were originally placed under review (898) and the number of subsequent rating actions (882) differ as, some of the bonds, were redeemed subsequent to September 1.

Methodology

The principal methodology used in rating these transactions is Applying Global Joint Default Analysis to Letter of Credit-Backed Transactions in the U.S. Public Finance Sector, published on September 1, 2010 (republished on October 18, 2010). Other methodologies and factors that may have been considered in the process of rating this issuer can also be found on Moody's website.

Rating Sensitivities

As the long-term ratings on these transactions are determined in part by the probability of default of the LOC provider and the obligor, an upgrade or downgrade of the ratings of either or both of these entities could result in a upgrade or downgrade of the transactions' ratings. Likewise, as the default dependence between the LOC provider and the obligor is another important input into the rating, a decrease in default dependence could result in an upgrade, and an increase could result in a downgrade.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings and public information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of maintaining a credit rating.

MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY'S is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

New York
Robert Azrin
Vice President - Senior Analyst
Public Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Naomi Richman
Senior Vice President - Team Leader
Public Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.

Moody's downgrades jointly supported LOC-backed U.S. municipal debt; 225 ratings and $15 billion of debt affected
No Related Data.
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