Fitch's decision has reverberated through the municipal market, impacting billions
Fitch Ratings (Fitch) has downgraded a substantial amount of public finance credits following its decision to strip the US government debt of its AAA status, as reported by Bloomberg. This downgrade to AA+, the second-highest ranking, had an impact on several municipal bonds, totaling $21.5 billion for the federally owned Tennessee Valley Authority’s global power bonds.
Moreover, Fitch’s rating cut extended to include $3.5 billion of pre-refunded municipal bonds, whose repayments heavily depended on US government and agency obligations held in escrow. An additional $1.8 billion of municipal housing bonds, secured mainly by mortgage-backed securities issued by Ginnie Mae, Fannie Mae, or Freddie Mac, were also affected. Despite these downgrades, Fitch reported a stable outlook for the affected bonds.
The warning of possible downgrades in the municipal-bond market was not unexpected, as Fitch had already indicated in May its concerns about the dependency of some public finance credits on sovereign credit for repayment. Approximately $42.5 million of debt related to the Federal Home Loan Banks of Atlanta and Des Moines remained under Fitch’s watch.
The US government debt rating downgrade to AA+ came on Tuesday, with Fitch citing concerns about the country’s financial outlook over the next three years. The rating agency expressed worries about factors such as tax cuts, new spending initiatives, economic shocks, and repeated political gridlock contributing to the anticipated deterioration.
The Tennessee Valley Authority, which supplies electricity to power companies in Tennessee and surrounding states, responded to the downgrade, stating that it doesn’t foresee any significant impact resulting from the rating cut.
“This is not driven by any TVA credit event,” the statement said, as reported by Bloomberg.
