Moody's Places 5 Aaa States on Review For Possible Downgrade Due To U.S. Sovereign Risk Vulnerability


Source: Moody's Investors Service - July 19, 2011

"MOODY'S PLACES RATINGS OF FIVE OF 15 Aaa STATES ON REVIEW FOR POSSIBLE DOWNGRADE DUE TO U.S. SOVEREIGN RISK VULNERABILITY

PPROXIMATELY $24 BILLION OF RATED DEBT AFFECTED; HIGH FEDERAL EMPLOYMENT AND MEDICAID EXPOSURE CITED

New York, July 19, 2011 -- Moody's Investors Service has placed on review for possible downgrade the Aaa ratings of the states of Maryland, New Mexico, South Carolina, Tennessee, and the Commonwealth of Virginia. In connection with Moody's July 13 action placing the Aaa government bond rating of the United States on review for downgrade, Moody's announced that it would assess the ratings of Aaa-rated states to gauge their sensitivity to sovereign risk. The review actions affect a combined $24 billion of general obligations and related debt.

Should the U.S. government's rating be downgraded to Aa1 or lower, these five states' ratings would likely be downgraded as well. Moody's will review the ratings of the five states on a case-by-case basis and announce any rating actions within seven to ten days following a sovereign action.

The ratings and outlooks of the 10 remaining states that have Aaa ratings have not changed and have not been placed on review for possible downgrade. These states are Alaska, Delaware, Georgia, Indiana, Iowa, Missouri, North Carolina, Texas, Utah and Vermont.

In Moody's view the ratings of the 10 Aaa-rated states not on downgrade review are resilient to a one notch downgrade of the sovereign bond rating at this time. Should the sovereign rating be lowered and move by more than one notch, Moody's would likely assess whether these remaining Aaa state ratings should be placed on review for downgrade as well.

RATIONALE FOR REVIEW

"While all states are indirectly linked to the U.S. government to some degree, we have identified the five Aaa-rated states that are most vulnerable to changes in the U.S. government rating," said Nicholas Samuels, a Vice President in Moody's State Ratings Team. These five states have above average exposure to several sovereign risk factors that Moody's outlined in a July 13 special comment, "Implications of a U.S. Rating Action for Aaa-Rated U.S. Municipal Credits." The risk factors are macroeconomic sensitivity, capital markets reliance, and dependence on federal revenues, offset by financial resources available to counteract those risks.

Moody's will perform additional analysis of the sovereign risk factors in the five affected states on a case-by-case basis, and examine additional mitigants to determine if their financial position and governance are strong enough to negate the impact of a potential U.S. downgrade. In the event the U.S. government's Aaa rating is downgraded due to a default following a failure to raise the debt ceiling, Moody's will not automatically downgrade these five state ratings but will proceed with case-by-case reviews."

Continue reading the announcement at Moodys.com

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