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Fitch U.S. Public Finance: Credit Trends Stable into 2007.

NEW YORK -- Fitch U.S. Public Finance saw continued credit strengthening during the fourth quarter, with positive rating actions far outweighing negative ones. Economic indicators continue to support a healthy municipal credit environment despite warnings of a 2007 economic growth slowdown and a weakening housing market. Third quarter gross domestic product (GDP) grew at a 1.95% annualized rate compared to 4.12% growth in the third quarter of 2005. Global Insight, an economic forecasting firm, reported that the slower growth was due in part to reduced residential construction, but the rest of economy is proving resilient. Fitch forecasts a 2.4% real GDP growth in 2007 (see 'Global Economic Outlook', dated November 24, 2006 on

The U.S. economy added 167,000 jobs (0.12% growth) in the month of December despite residential construction and manufacturing sectors losing 5,800 and 12,000 jobs, respectively. Contributing to the increase, and almost completely offsetting residential construction job loss, was an addition of 4,600 jobs in the nonresidential construction sector, indicative of employers' interest to increase capacity to meet still strong consumer demand. November-over-November personal consumption increased by 5.7% in 2006 while same period personal income fared comparably by growing 5.4%. This marks a minor departure from the higher 2005 same period growth of 6% and 6.2% in consumption and personal income, respectively.

The number of upgrades in the fourth quarter of 2006 far exceeded downgrades with an upgrade-to-downgrade ratio of 2.7:1, or 4.2:1 on par basis. The number of upgrades has exceeded downgrades in seven out the last nine quarters, partly reflecting tax-exempt issuers' improved financial performance in a relatively strong economic environment over the last two to three years. Of the 49 upgraded credits in the quarter, 28 were tax-supported and 11 were healthcare revenue supported. More than half (57%) of the $24 billion in upgraded par were healthcare credits, with large national systems making up the bulk of that amount. The most notable healthcare systems upgraded in the quarter were Ascension Health (senior obligations upgraded to 'AA+' from 'AA'), Catholic Healthcare West (upgraded to 'A+' from 'A-'), and Trinity Health Credit Group (upgraded to 'AA' from 'AA-'). Outside of healthcare, other notable upgrades include Los Angeles County Metropolitan Transportation Authority sales tax bonds ('A' and 'A+' rated tiers upgraded to 'AA-'), Massachusetts Port Authority general revenue bonds (upgraded to 'AA' from 'AA-'), and the State of Tennessee general obligation bonds (upgraded to 'AA+' from 'AA').

Of the 18 downgrades in the last quarter of 2006, representing $5.7 billion of debt, seven were tax supported, four were healthcare revenue supported, and three were transportation revenue supported. The largest downgrade on a par basis was Philadelphia School District's $2.2 billion in general obligation bonds, whose underlying rating was lowered to 'BBB-' from 'BBB', reflecting deterioration in the district's financial condition. Similarly, Detroit School District's underlying general obligation rating was downgraded to 'BB+' from 'BBB-', due to continued reductions in student headcount. Five downgrades were to the city of Pontiac, MI and its tax increment finance authorities. The downgrades of all five credits to below investment grade reflect severely constrained financial flexibility, a structural deficit, and inadequate financial reporting controls. In the transportation sector, two credits were downgraded to the 'CCC' category including Northwest Parkway (CO) toll revenue bonds (downgraded to 'CCC+' from 'BB-') and Las Vegas Monorail senior lien revenue bonds (downgraded to 'CCC' from 'BB').

As of year-end, there were 23 credits on Rating Watch Negative (RWN) and two on Rating Watch Positive (RWP), vs. 21 on RWN and two on RWP at the end of the second quarter. The five downgraded credits associated with Pontiac, MI were also placed on RWN pending the release of fiscal 2006 audited results which are expected to show additional deficits. Another credit that was placed on RWN is the Seminole Tribe of Florida gaming revenue bonds which was simultaneously downgraded on December 8 after the announcement that the tribe plans to acquire Hard Rock from Rank Group Plc for a purchase price of $965 million; the Rating Watch Negative will be resolved following an evaluation of the final structure of the acquisition and its impact on bondholders.

Credits taken off RWN in fourth quarter include State of New Jersey cigarette tax revenue bonds (affirmed following favorable legislative and administrative actions); Susquehanna Area Regional Airport Authority revenue bonds (senior bonds downgraded following the management's decision to circumvent the flow of funds under the master indenture; both senior and subordinate lien interest payments were made from draws on the debt service reserve fund, thereby calling into question the additional protection accorded to senior lien bondholders); and Detroit School District general obligation bonds (removed from RWN in conjunction with the underlying rating downgrade).

The ratio of credits on Positive Rating Outlook-to-Negative Rating Outlook is at its highest level since US Public Finance started publishing the ratio in 2002. As of December 31, 2006, the Positive-to-Negative Rating Outlook ratio was 0.93:1, with 92 credits assigned a Positive Rating Outlook and 97 credits assigned a Negative Rating Outlook. The improvement from the third quarter's ratio of 0.83:1 is largely attributable to revisions to Stable from Negative of five credits secured by Chicago's O'Hare International Airport in conjunction with an upgrade of the airport's general airport revenue bonds. Fitch continues to be cautious regarding the airport sector however, with nine airport credits on Negative Rating Outlook vs. only four on Positive Rating Outlook, as well as the healthcare sector, with 24 credits on Negative Rating Outlook vs. 18 on Positive Rating Outlook.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
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Publication:Business Wire
Date:Jan 16, 2007
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