Downgrade of United States Sovereign Credit Rating Affects Bonds
On Friday, August 5, 2011, Standard & Poor's (S&P) downgraded its long-term sovereign credit rating on the United States of America from AAA to AA+. While no one can predict exactly what the consequences of this downgrade will be to state and municipal debt issuances, the impact is expected to be broad as S&P began downgrading certain municipal issues and federal governmental agencies on Monday, August 8, 2011.
Likely Consequences to State and Local Issuers
The most likely candidates for downgrade are those issues that have been advanced refunded and are backed by U.S. Treasury securities pending retirement of the refunded bonds. Although advance refunded debt is not considered to be "outstanding" for debt limitation and certain other purposes, these securities are still held in the open market and are subject to a ratings downgrade. Other candidates for downgrade are those issues that are backed by other federal guarantees, such as housing bonds, student loan bonds or investment pools that invested in U.S. Treasuries. For example, on Monday, August 8, more than 11,000 municipal bonds that had been rated AAA by S&P were downgraded, including bonds that had been advance refunded with U.S. Treasuries and also those backed by the federal housing agencies, Freddie Mac and Fannie Mae.
If you currently have advanced refunded issues that have not been fully retired, you should be aware of the possibility of a downgrade and any resulting disclosure obligations. In addition, if your investment policy requires that you invest in securities rated at the highest rating level by S&P, you should be mindful of these downgrades.