S&P Cuts AAA Ratings on Thousands of Municipal Bonds

S&P Cuts AAA Ratings on Thousands of Municipal Bonds After U.S. Downgrade
By Sarah Frier and Michelle Kaske - Aug 9, 2011 5:01 AM GMT+0100

Standard & Poor’s lowered the AAA ratings of thousands of municipal bonds tied to the federal government, including housing securities and debt backed by leases, following its Aug. 5 downgrade of the U.S.

The rating company assigned AA+ scores to securities in the $2.9 trillion municipal bond market including school- construction bonds in Irving, Texas; debt backed by a federal lease in Miami; and a bond series for multifamily housing in Oceanside, California. Olayinka Fadahunsi, an S&P spokesman, said he couldn’t provide a dollar figure on the affected debt.

S&P also cut ratings on securities backed by Fannie Mae and Freddie Mac, prerefunded issues and munis repaid by using federal assets, also known as defeased or escrow bonds. No state general-obligation ratings were affected and the company said some may remain unchanged.

“It’s expected, but nobody is happy about it,” Bud Byrnes, chief executive officer of Encino, California-based RH Investment Corp., said in a telephone interview. “No one that I know thinks it was justified to cut the U.S. bonds to AA+. Once that happened, you knew that any prerefunded bonds or escrowed bonds would be downgraded too. It’s a domino effect.”

Byrnes said funds required to invest in AAA bonds would be most affected by the downgrades and may be forced to liquidate some holdings. “They will have a hard time replacing that yield,” he said.

To contact the reporters on this story: Sarah Frier in New York at sfrier1 @ bloomberg . net; Michelle Kaske in New York at mkaske @ bloomberg . net

To contact the editor responsible for this story: Mark Tannenbaum at mtannen @ bloomberg . net

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