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MOODY'S COMMENTS ON 1991 MUNICIPAL VOLUME AND RATING TRENDS

 MOODY'S COMMENTS ON 1991 MUNICIPAL VOLUME AND RATING TRENDS
 NEW YORK, Jan. 9 /PRNewswire/ -- Moody's Investors Service announced today results of municipal bond rating activity for 1991.
 The near-record level of both long- and short-term municipal debt in 1991 led to an increase of 30 percent more ratings assigned over 1990. Specifically, the agency reported that nearly 11,500 municipal ratings were assigned, the second highest annual number in the rating agency's history.
 According to Daniel Heimowitz, executive vice president and director of Moody's Public Finance Department, 1991 was characterized by heavy new issue volume amid growing recessionary pressures on municipal credit quality. "The level of market activity in 1991 reflects the continued need of state and local borrowers to issue debt to pay for basic infrastructure requirements," Heimowitz said. "The very favorable interest rate environment made it particularly attractive for issuers to finance capital projects, as well as to refinance existing debt. The national recession was also a contributing factor to the year's heavy volume, as some issuers accelerated capital spending to counter recessionary effects, while others issued debt in place of what would otherwise have been 'pay-as-you-go' financings.
 "And in some cases, issuers borrowed to finance deficits. The debt repayment capacity of many issuers began to erode last year. This was particularly true as state governments felt the combined pressure of past federal cutbacks and mandates and the effects of the recession, which forced them to downshift cutbacks to their own localities through reduced aid."
 Heimowitz noted that the year's pressures were most dramatically evident in Bridgeport, Conn.'s highly publicized bankruptcy filing, and by the prolonged and very difficult budget battles in the Northeast, where the recession has had the most pronounced effects, and where localities have run out of easy or 'one-time' adjustments. "The problems the Northeast has experienced may be a preview of problems in other parts of the country if economic recovery does not ease budget pressures. Some of the most hard-pressed states in the Northeast, however -- such as Massachusetts -- are demonstrating the resilience of state governments by making structural budget adjustments. In 1992, many other states and localities will be faced with similar fundamental adjustments regarding the basic direction of their tax and spending policies. Their success in making these adjustments will be a key determinant in Moody's municipal credit assessments."
 Long-term Ratings
 Moody's reports assigning over 8,100 ratings to long-term, unenhanced debt issues in 1991, compared with under 6,600 for 1990. (Unenhanced ratings are those not based on the presence of an insurance policy or any other type of credit-support vehicle.) Of the 8,100 ratings, 83 percent were confirmations of previously assigned ratings, 12 percent were assigned to new debt issues, and approximately 5 percent represented rating revisions. The rating agency attributed the increase in long-term activity to the recessionary pressures and growing capital needs cited above, as well as the added incentive on the part of some municipal issuers to achieve the positive counter-cyclical benefits that can be gained through accelerated capital spending.
 In 1991, 431 ratings were revised -- approximately 5 percent of all long-term, unenhanced ratings assigned during that time. Of that number, 244 were upgrades and 187 downgrades. General obligation and other tax-supported debt had a balanced ratio of upgrades to downgrades (153:145), while revenue-supported bonds had a far more favorable ratio of 2:1, with 91 ratings raised and 42 lowered. In general, municipal enterprises enjoy more revenue-raising flexibility to meet debt service and other costs than do their tax-supported counterparts because enterprise systems operate somewhat independently and are generally more removed from the political process.
 Moody's emphasized the low percentage of ratings revised during the course of the year. Heimowitz explained that Moody's does not react to every upturn or downturn experienced by a given issuer, and stressed that the low number of revised ratings provides evidence that Moody's ratings reflect long-term credit fundamentals and tend to anticipate the effects of normal business cycles. Despite budgetary stresses, most issuers have continued to operate in a sound, responsible manner.
 Heimowitz went on to say, however, that 1992 could bring more downgrades. "If the current recession continues into 1992 -- and thus far, it has defied the predictions of most economic experts -- there will likely be a downward shift in overall credit quality. Many municipal borrowers have already made all possible short-term adjustments: reserve funds are depleted and 'one-shot' revenue fixes have been used, particularly by some of the large, high-profile issuers. We believe, therefore, that a cautious approach to fiscal operations by state and local governments would be most prudent for the coming year. The large-scale downsizing by corporations, the rapid increase in social service case loads and expenses, and the clear articulation by taxpayers of their reluctance to pay higher taxes combine to create a very difficult backdrop for the preparation of financial plans. Continued offloading of responsibility to the local level by state governments, as well as reductions in state aid that have occurred over the last several years, will only exacerbate the financial crunch for many municipal issuers. As a result, the credit ratings of many state and local entities could suffer."
 Short-Term Ratings
 The number of note ratings assigned by Moody's Public Finance Department in 1991 was 38 percent higher than that of 1990. During 1991, Moody's assigned 451 short-term municipal note ratings, compared with 326 assigned during 1990. As was the case in the long-term sector, the dramatic growth in the short-term market reflects increased budgetary constraints resulting from the current economic slowdown and reduced levels of discretionary funds. Heimowitz stated that "our analysts are seeing more and larger notes issued because there is less internal liquidity to bridge gaps in timing between cash receipts and disbursements." Another reason for the increased note activity is that, during the budgeting process in many localities, levels of anticipated state funding were uncertain.
 Credit-Enhanced Ratings
 Municipal issuers continued to seek bond insurance in 1991, in order to enhance market acceptance for their bonds and decrease the cost of debt service. In 1991, nearly 2,500 insured issues were rated by Moody's, while just under 1,700 insured issues were rated in 1990. Over 22 percent of all long-term ratings assigned in 1991 were to insured issues. Much of the growth in the insured market was due to the demand by individual investors, primarily through bond funds, for highly rated municipal securities.
 Letter-of-credit volume decreased significantly in 1991. In 1990, Moody's rated 260 debt instruments backed by bank letters of credit. That number dropped to 198 for 1991. Reasons for the decrease include the decline in credit quality of U.S. and foreign banks, a drop in banks' capacity to issue LOCs as a result of increased capital requirements, and stricter criteria imposed by those banks that continue to issue LOCs. The overall decline in variable-rate volume has also played an important role. The current low interest rate environment has spurred the growth of the fixed-rate market; as most LOCs are variable-rate instruments, LOC issuance has declined.
 One effect of the shrinkage in the LOC market was the substantial increase in the growth of derivative products in response to issuer demand for short-term paper. Moody's rated $2.7 billion of derivative products in 1991, in contrast to $1.1 billion rated in 1990. The number of ratings assigned to standby bond purchase agreements, custodial receipts and municipal strips grew dramatically in 1991.
 -0- 1/9/92
 /CONTACT: Daniel Heimowitz, executive vice president and director, Public Finance Department, 212-553-0340; William F. deSante, vice president and managing director, Structured Finance Ratings, 212-553-0353; George Leung, vice president and managing director, State Ratings, 212-553-0342; or Jeffrey Rizzo, vice president and managing director, Regional Ratings, 212-553-0354, all of Moody's/ CO: Moody's Investors Service ST: New York IN: SU: ECO


BR-BN -- NY059 -- 8387 01/09/92 16:29 EST
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