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Global Credit Research - 01 Sep 2010
New York, September 01, 2010 -- Moody's Investors Service has published an updated methodology for
the way it assigns ratings to jointly supported letter of credit (LOC)-backed
debt in the US municipal market. As a result of the changes to
the methodology, the long-term ratings on 755 outstanding
transactions have been placed under review for possible downgrade.
An additional 142 transactions that are already under review for possible
downgrade will also be affected by the methodology as well as one transaction
that is under review -- direction uncertain. A detailed list
of ratings affected is available on the company's website at: http://v3.moodys.com/viewresearchdoc.aspx?docid=PBM_PBM127314.
The ratings on transactions supported by Aaa-rated LOC banks or
issued by or on behalf of Aaa-rated obligors will remain Aaa under
the updated methodology and are not under review. The short-term
ratings of all LOC backed bonds continue to be based solely on the short-term
rating of the applicable LOC bank. Moody's also stresses
that the updated methodology does not affect the underlying ratings of
the obligors or the rating agency's opinion of their credit quality.
Moody's originally proposed the changes to its ratings approach
as a request for comment in July. After considering market feedback,
the rating agency is moving forward with its plans to apply its joint
default analysis approach (or JDA) used to rate other sectors to LOC-backed
As with Moody's earlier approach to rating these transactions --
called joint support analysis -- 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 changes under the new approach are twofold. The first is that
Moody's will now utilize 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 the global
scale ratings assigned to the entities and are consistent with those default
rates used in the application of the JDA approach in rating assessments
in other sectors.
The second is that the rating agency has introduced a new analytical framework
for determining default dependence between the obligor and the LOC bank.
This analysis considers the degree of revenue overlap between the obligor
and the bank, and the financial and operational linkages between
the obligor and the bank and the banking sector. 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.
Moody's has placed the existing joint support ratings of 898 municipal
LOC-backed transactions under review for possible downgrade while
it assesses these ratings under the updated methodology. The reviews
are expected to be resolved within the next 60 days. Moody's
expects long-term joint support ratings on these transactions will
be lowered by 0 to 3 notches, with approximately 75% within
one notch and 95% within two notches.
As the JDA approach recognizes the potential benefit of dual support,
transactions may achieve a JDA long-term rating that is higher
than that of either the obligor or the LOC bank. The ratings of
new transactions based on the JDA approach could be 0 to 2 notches above
the higher of the LOC bank's or obligor's long-term
For more information, see "Applying Global Joint Default Analysis
to Letter of Credit-Backed Transactions in the U.S.
Public Finance Sector" available on www.moodys.com.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history for each transaction.
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. Other methodologies and factors that
may have been considered in the process of rating this issuer can also
be found on Moody's website.
* * * * *
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Vice President - Senior Analyst
Structured Finance Group
Moody's Investors Service
MD - Public Finance
Structured Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's updates methodology for rating jointly supported muni LOC-backed debt; 898 ratings on review
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