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2017 Annual US Public Finance Default Study And Rating Transitions 2017 Annual US Public ... PDF

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DDeeffaauulltt,, TTrraannssiittiioonn,, aanndd RReeccoovveerryy:: 22001177 AAnnnnuuaall UU..SS.. PPuubblliicc FFiinnaannccee DDeeffaauulltt SSttuuddyy AAnndd RRaattiinngg TTrraannssiittiioonnss MMaayy88,,22001188 U.S.publicfinance(USPF)bondsratedbyS&PGlobalRatingsdefaultedattheirsecond-highest GLOBALFIXEDINCOMERESEARCH rateonrecordandestablishedanewhighforthenumberofdefaultsin2017.Theoveralldefault LawrenceRWitte,CFA rateof0.09%resultedlargelyfrom14defaultsinPuertoRico,comparedwithjustsixinother SanFrancisco partsoftheU.S. (1)415-371-5037 larry.witte ThedisproportionatenumberofdefaultsinPuertoRicomitigatesmostconcernsaboutgeneralor @spglobal.com risingcreditdistressamongratedmunicipalbonds.PuertoRicandefaultshaveaccountedfor ZevRGurwitz morethantwoofeverythreeinUSPFsince2015.OutsideofPuertoRico,USPFdefaultshavebeen NewYork rareoverthepastthreeyears,averagingaboutfiveperyear,whichisinlinewiththeaverage (1)212-438-7128 numberofdefaultssince1986.IncludingPuertoRicandefaults,thenumberofdefaultshasgrown zev.gurwitz overthepastthreeyears,butthisincreasewasalmostinevitable,sincethenumberofUSPF @spglobal.com ratingshasgrowntomorethan23,000fromfewerthan8,000in1986. SECONDARYCONTACT Despitethegrowingnumberofratings,2018couldendtherecenttrendofincreasingdefaults. NicholasJCastro NewYork Thisyearbeganwith28ratingsinthe'CCC'categoryorlower,comparedwith36atthestartof +1(212)4384522 2017.Theseratingsaremoredispersedthanin2017,withjustseveninPuertoRico,compared nicholas.castro with22in2017. @spglobal.com Formoreinformation,seethevideotitled"PuertoRicoLedTheNumberOfRecordDefaultsInU.S. PublicFinanceIn2017,"availableat: https://www.spratings.com/en_US/video/-/render/video-detail/7333-witte-uspf-default-and-transition-study-2017-v1. www.spglobal.com/ratingsdirect May 8, 2018 1 Default, Transition, and Recovery: 2017 Annual U.S. Public Finance Default Study And Rating Transitions Overview - Forthethirdyearinarow,thenumberofdefaultsinUSPFrose,reachingarecord20in 2017.PuertoRicoaccountedfor14ofthedefaults. - ThedefaultrateforUSPFwas0.09%,thesecondhighestsince1986.Nonetheless,this rateremainsextremelylow. - Theratingson903bondswereraisedin2017,whiletheratingson708bondswere lowered. - States,highereducation,healthcare,charterschools,andhousinghadmore downgradesthanupgradesin2017;thiswasthesecondconsecutiveyearofnegative ratingtrendsforstates,healthcare,andhousingandtheseventhstraightnegativeyear forcharterschools. - USPFratingsperformancehasbeenconsistentwithhistoricaldefaulttrends,evenat differenttimehorizons.From1986-2017,theone-,three-,five-,and10-yearaverage Ginicoefficientswere95%,86%,80%,and74%whenexcludinghousing.HousingGini valueswerenotasstrongbutstillstable,withaone-yearcoefficientof89%. Althoughtherisingnumberofdefaultsinrecentyearsisnotanindicationofgeneralcreditstress, thedispersionofdowngradesamongvarioussectorswithinUSPFcouldsuggestlessoptimistic ratingtrends.USPFhad903upgradesand708downgradesin2017,butthispositiveresultisdue largelytothelocalgovernmentsectorandissuerswithinCalifornia,whichrespectivelyrecorded 386and240moreupgradesthandowngrades. Theratioofupgradestodowngradeswasessentiallythesamein2017asin2016,at1.27,butfive ofeightsectorshadahighernumberofdowngradesthanupgradesin2017.Thisisanincrease fromfournegative-leaningsectorsin2016andtwoin2015.Itispossiblethat2017'shigher numberofnegative-leaningsectorswasananomalythatwon'tberepeatedin2018.Ontheother hand,shouldtrendsshiftsignificantlyforlargegroupsthatleanpositive,likelocalgovernment, theratioofupgradestodowngradeswouldprobablyfallbelowthe2017ratio. OverallRatingMovementWasPositive,ButSectorMovementWas Mixed Negativeratingtrendswereevidentacrossmostsectorsin2017,butthepositivemovementofthe largestsector,localgovernment,boostedoverallUSPFratingactivityintopositiveterritory. Meanwhile,forthesecondstraightyear,thestatesectorexperiencedahighnumberof downgrades,multipliedbythemanyappropriationratingsthatchangedupontheloweringofstate generalobligation(GO)ratings. Highereducationhadmoredowngradesthanupgradesin2017,reversingthepositiveratingtrend of2016,whichresultedfromrevisedcriteria.Charterschoolsalsoleanednegative,althoughnotto thesamedegreeasinpreviousyears.Healthcareandhousingratingmovementwasnegativefor thesecondconsecutiveyear.Transportationandutilitiesbothhadmoreupgradesthan downgradesineachofthepastthreeyears. www.spglobal.com/ratingsdirect May 8, 2018 2 Default, Transition, and Recovery: 2017 Annual U.S. Public Finance Default Study And Rating Transitions Table1 USPFRatingChangesBySector --2017-- --2016-- --2015-- Upgrades Downgrades Upgrades Downgrades Upgrades Downgrades Stategovernment 2 204 6 264 133 122 Localgovernment 670 284 608 229 648 249 Utility 109 56 183 78 132 62 Housing 34 45 61 76 62 11 Highereducation 19 39 64 56 15 43 Healthcare 31 38 38 39 83 45 Transportation 20 4 25 5 32 4 Charterschools 18 38 10 34 6 24 Total 903 708 995 781 1,111 560 Note:Basedonquarterlyratingchanges.Stategovernmentratingsincludesomeratingsnotassociatedwiththegeneralobligationrating,as wellasappropriationratings.Source:S&PGlobalFixedIncomeResearch. Dataconstraintspreventthisstudyfromdistinguishinglocalgovernmentfromstateratingsin mostinstances.Thesetwosectorsarecombinedintotworatingtypes,taxsecuredand appropriation.Thetax-securedcategorycoversstateorlocalgovernmentGOs,while appropriationdebtissubjecttoannualappropriationsbyissuersandistypicallyratedonenotch lowerthantheGOrating. Mosttax-securedandappropriationratingsareforlocalgovernment,solocalgovernmentrating movementgenerallydeterminesthedirectionofchangesforthesetworatingtypes.Forthepast threeyears,S&PGlobalRatingshascategorizedeverytax-securedandappropriationrating actionaseitherstateorlocalgovernmentinitsquarterlyratingreports.Localgovernmentrating movementhasbeenconsistentlypositiveoverthepastthreeyears,whereasstateratingshave beenloweredmuchmorefrequentlythanraisedduringthepasttwoyears.Thegeneralpatternof upgradessurpassingdowngradesforthetax-securedandappropriationsectorsislargelydueto theraisingoflocalgovernmentratings. Therewere165fewerUSPFratingactions(92fewerupgradesand73fewerdowngrades)in2017 thanin2016.Thiswasthesmallestnumberofupgradessince2012andthefourth-highest numberofdowngradessince2000.Ofthepast16years,only2011,2014,and2016hadmore downgrades.In2011,S&PGlobalRatingsloweredmorethan1,000housingratingsthatweretied tothesovereignratingontheU.S.,whichwasloweredto'AA+'from'AAA'.Thehighernumberof downgradesin2014stemmedfromtheapplicationofrevisedcriteriainlocalgovernment,which alsospurredalargenumberofupgrades.Thelargenumberofstateappropriationdowngradesin 2016causedtheoverallnumberofdowngradestoswell. RatingTransitionsIn2017 USPFratingtransitionsin2017reflectedstrongermovementamongratingsinthe'A'categoryor lower.Ratingsinthetwohighestratingcategoriesweremorelikelytosliptolowercategoriesthan toberaised,mostlyduetohavingnoorverylittleroomforimprovement.Nevertheless,just2.04% ofratingsinthe'AAA'and'AA'categorieswereloweredin2017,comparedwith5.18%ofsuch ratingsthatwerewithdrawn. www.spglobal.com/ratingsdirect May 8, 2018 3 Default, Transition, and Recovery: 2017 Annual U.S. Public Finance Default Study And Rating Transitions Anaverageof95.6%ofUSPFratingsinthethreehighestcategoriesended2017inthesame categoryorhigher.'BB'and'B'ratedbondsweremorelikelytobeupgradedthandowngraded, anddefaultswereextremelyrareinthesetwocategories.The20defaultsweremostlyfrom obligationsrated'CCC'orlowerinPuertoRico.Bondsrated'CCC'orlowermakeupaverysmall percentageofUSPFratings,but48.5%ofobligationsinthatratingcategoryatthestartof2017 defaultedduringtheyear. Table2 USPF2017One-YearTransitionRatesByRatingCategory (%) Upgrade Downgrade Nochange Default Withdrawn %ofUSPFratings AAA N/A 0.85 98.10 0.00 1.06 5.10 AA 0.20 1.19 94.49 0.00 4.12 44.75 A 2.10 0.70 92.00 0.00 5.20 42.36 BBB 3.87 2.49 87.15 0.00 6.49 6.47 BB 6.96 4.40 78.75 0.73 9.16 1.27 B 8.77 7.02 71.93 0.00 12.28 0.30 CCC/C 9.09 N/A 39.39 48.48 3.03 0.12 N/A--Notapplicable.Source:S&PGlobalFixedIncomeResearch. CausesOfRatingActions Ourquarterlyreportsfoundthatfinanceswerethemostcommonreasonforratingchangesin 2017,aswouldbeexpectedgiventheemphasisonfinancesinS&PGlobalRatings'criteria.In 2017,therewere530upgradesand518downgradesforfinancialreasons.Thiscompareswitha slightlynegativetrendin2016,when505upgradesand513downgradesprimarilyresultedfrom financialcauses. Notethatthenumbersofratingactionsinthissectiondonotmatchthosethroughoutmostofthe reportbecausethedataherearebasedonquarterlyactivity,asopposedtotheentireyear.See "Annualversusquarterlyratingmovement"intheappendixforadescriptionofthemethodology usedfortrackingratingactionsonaquarterlybasis. www.spglobal.com/ratingsdirect May 8, 2018 4 Default, Transition, and Recovery: 2017 Annual U.S. Public Finance Default Study And Rating Transitions Chart1 Thesecondmostinfluentialfactorinourquarterlyreportswastheeconomyofrespective jurisdictions,whichspurred160upgradesand18downgradesinUSPF,animprovementoverthe still-positivemovementof175upgradesand52downgradesin2016.Realestatevalues,which arerelatedtoeconomicfactors,spurredanadditional38upgradesandnodowngradesin2017. In2017,economicfactorsledtosevendowngradesamongstates,similarinproportionifnotin sizeto2016,whentherewere36downgradesandjusttwoupgradesamongstatesdueprimarily toeconomicfactors.In2015,thelastyearofmoreupgradesthandowngradesforstates,there werenoratingchangesthatcitedeconomicfactorsastheprimaryreason. S&PGlobalRatings'forecastforU.S.GDPgrowthis2.9%in2018,higherthan2.3%in2017.Faster economicgrowthcouldhaveapositiveeffectonmunicipalratings--oratleastcontinuethetrend ofupwardmovementfromeconomicfactors. Debtservicecoveragewasthethirdmostcommonfactorinratingchangesin2017.Themostly positiveratingmovementspurredbydebtservicecoveragewasmostpronouncedin transportationandlocalgovernment.Criteriaapplication(i.e.,theapplicationofrevisedcriteriaor differentcriteriathanwereinitiallyused)wasthefourthmostcommoncauseforratingchanges, accountingforslightlymoreupgradesthandowngrades. HistoricalStabilityOfUSPFRatings Fortheyearscoveredinourstudy(Jan.1,1986-Jan.1,2018),unenhanceddebt(debtobligations notsupportedbyfinancialguarantees,structuringtechniques,multiple-partyfeatures,orother externalcreditsupport)ratedbyS&PGlobalRatingsgenerallyhasdemonstratedsignificantcredit stabilitythroughoutawidevarietyofevents,includingvariouseconomiccycles,federal governmentmandates,andtaxreformmeasures.Thedatasuggestthefollowing: - Thereisacorrelationbetweentheratingandthelikelihoodofdefault,wherebyhigher-rated www.spglobal.com/ratingsdirect May 8, 2018 5 Default, Transition, and Recovery: 2017 Annual U.S. Public Finance Default Study And Rating Transitions issueshavealowerrateofdefaultandviceversa. - Higher-ratedissuesgenerallytakelongertodefaultthanlower-ratedissues,andaseriesof incrementalratingchangestypicallyprecedesadefault. - Higherratinglevelscorrespondtogreaterratingstabilityandviceversa. - Ratingdistributionsthroughoutthesectorremainedrelativelystabledespiteeconomicstress, includingtheGreatRecessionandtheslowrecoverythereafter. Becausehousingsectordebtratingsreflectthecreditqualityofamixofbothpublic-sector entitiesandexternalcreditenhancementproviders,wepresentconclusionsfromthissectorin separatetables.ThefollowingUSPFdebttypesoutsideofhousingareincludedinthisstudy: - Generalobligation(GO) - Lease/appropriation/moralobligation - Specialtax(sales,gas,etc.) - Specialdistrict - Waterandsewerrevenue - Publicpower - Airports - Ports - Tollroadsandbridges - Parking - Varioustypesofbondpools - Transit - Publicandprivatehighereducation - Auxiliaryhighereducationdebt - Independentschools - Nonprofitentitiesandorganizations - Charterschools - Hospitals(stand-aloneandsystems) - Continuingcare - Physicians'practices Ouranalysisofhousingratingsinthetextandtablesincludesallthetypesofmunicipalhousing onwhichS&PGlobalRatingsmaintainsratings.Theseincludethefollowing: - GOforhousingfinanceagenciesandsocialhousingproviders,includingpublichousing authoritiesandcommunitydevelopmentfinancinginstitutions - Single-familywholeloans - Single-familyU.S.government-supportedmortgage-backedsecurities(MBS) - MultifamilyloansforaffordablehousingwithU.S.governmentsupport www.spglobal.com/ratingsdirect May 8, 2018 6 Default, Transition, and Recovery: 2017 Annual U.S. Public Finance Default Study And Rating Transitions - MultifamilyloansforaffordablehousingwithoutanexplicitorimpliedU.S.guarantee - Militaryhousing - Mobilehomeparks - Section8multifamilyhousing - Capitalfundsecuritizationforpublichousingauthorities DefaultsIn2017 In2017,20ratedUSPFbondsdefaulted,upfrom15in2016,12in2015,andeightin2014.The defaultrateof0.09%waslowbutmorethantwicethemeanof0.04%.PuertoRicandefaults dominatedthelist,asintheprevioustwoyears.All14ofthePuertoRicandefaultswerefromthe tax-securedorappropriationcategories. The18defaultednonhousingbondsstarted2017withspeculative-graderatings('BB+'orlower) priortodefault,andsixofthemwereinitiallyassignedratingsof'BBB-'orlower.Fivewereinitially assignedratingsinthe'A'category. Twohousingbondsdefaultedin2017.Theywereunenhancedmultifamilybondsforthesame propertywithseniorandsubordinatetranches.Theoriginalratingswere'A-'and'BBB',andboth bondswererated'B-'atthetimeofdefault. Chart2 Belowisachronologicallistofthe20defaultsinUSPFin2017amongbondsthatS&PGlobal Ratingsrated.Foramoredetailedlistofalldefaultsrecordedsince1986,pleaserefertotables10 and11. www.spglobal.com/ratingsdirect May 8, 2018 7 Default, Transition, and Recovery: 2017 Annual U.S. Public Finance Default Study And Rating Transitions - AllenAcademy,Mich.(Jan.11) - WillacyCounty,Texas,LocalGovernmentCorp.(April12) - PuertoRicoSalesTaxFinancingCorp.(June6) - PuertoRicoSalesTaxFinancingCorp.(June13) - NineissuesinPuertoRico(July31) - LinkedEconomicDevelopmentandAffordableHousingFoundation(LEDAHF)--EastCleveland LLC,twoissues(Sept.1) - SanLuis,Ariz.,FacilitiesDevelopmentCorp.,twoissues(Oct.19) - PuertoRicoEmployeesRetirementSystem,threeissues(Dec.22) Chart3 ThenumberofUSPFdefaultsinthepastsixyearshasbeenaboveaverage,andtheoveralldefault ratein2017washigher,at0.09%,thantheaveragedefaultratefrom1986-2017of0.04%.The nonfinancialcorporatedefaultrateintheU.S.averaged2.03%from1981-2017.Asmallnumber ofissuershaveaccountedforthemajorityofdefaultsinUSPF.Theconcentrationofdefaultsin PuertoRicoindicatesthattheabove-averagedefaultfrequencyinrecentyearswasdueto isolatedcauses,asopposedtoindicatinganoverarchingtrend. Thehighernumberofdefaultssince2012haspushedtheannualmeannumberofdefaultsto5.97 forallofUSPF(includinghousing),andforthepast32years,themediannumberofdefaultswas threeexcludinghousingandonewithinhousing. www.spglobal.com/ratingsdirect May 8, 2018 8 Default, Transition, and Recovery: 2017 Annual U.S. Public Finance Default Study And Rating Transitions Chart4 DefaultRatesBySector Defaultsarerareamongratedmunicipalbonds,asevidencedbythelowoverallUSPFdefaultrate of0.04%from1986-2017.Themean1986-2017defaultrateforUSPFbondsexcludinghousingis 0.03%withamedianof0.02%.ThemeandefaultrateforUSPFhousingbondsduringthesame periodis0.07%withamedianof0.04%.Theseratesareunchangedfromthe1986-2016averages. ThedefaultrateforUSPFexcludinghousingwas0.08%in2017,andforhousingaloneandforall ofUSPFincludinghousing,itwas0.09%.DefaultratesvaryamongUSPFsectors,althoughthey areallgenerallylow.Tax-securedbondshaveameanannualdefaultrateof0.01%since1986, whileappropriationratingshaveameandefaultrateof0.04%.Utilitiesandhighereducationare theonlysectorsbesidesthetax-securedcategorytohavedefaultrateslowerthanthatofthe appropriationcategory,bothat0.03%.Revenuebonds,whichincludeallissuesexceptthosein thetax-secured,appropriation,andhousingsectors,haveanaveragedefaultrateof0.06%. Healthcarehasthehighestmeandefaultrate,at0.12%,andtransportationandhousingfollowat 0.07%each. Thetablebelowsummarizesthe2017defaultratesandthemeanandmediandefaultratesfrom 1986-2017foreachsectorinUSPF.Charterschoolsrecordedthehighestdefaultratein2017,at 0.36%.Appropriationdebtdefaultedatthenext-highestrate,at0.20%,duetothemanydefaults inPuertoRico.Defaultratesforbothsectorswerewellaboveaverage.Utility,highereducation, healthcare,transportation,andrevenuebondshadlowerdefaultratesthannormal.Formore detailsondefaultratesbysector,pleaserefertotables12-22. www.spglobal.com/ratingsdirect May 8, 2018 9 Default, Transition, and Recovery: 2017 Annual U.S. Public Finance Default Study And Rating Transitions Table3 USPFDefaultStatisticsBySector --Defaultrate(%)-- 2017tally 2017 Mean Median Taxsecured 8 0.06 0.01 0.00 Appropriation 9 0.20 0.04 0.00 Utility 0 0.00 0.03 0.00 Highereducation 0 0.00 0.03 0.00 Healthcare 0 0.00 0.12 0.06 Transportation 0 0.00 0.07 0.00 Charterschools 1 0.36 0.06 0.00 Totalnonhousing 18 0.08 0.03 0.02 Revenue* 1 0.02 0.06 0.05 Housing 2 0.09 0.08 0.04 TotalUSPF 20 0.09 0.04 0.04 Note:Meanandmedianfiguresrepresent1986-2017.*Revenueincludeseverythingexcepttaxsecured,appropriation,andhousing.Source: S&PGlobalFixedIncomeResearch. TransitionRatesRemainHighlyStable Thisstudy'stransitionanalysisrevealsthedegreetowhichratingschangeovertime.Inthe transitiontables,theintersectionofarowandcolumnofthesameratingshowsthepercentageof thatratingthatstartedandendedtheperiodatthatrating.Ifratingsneverchanged,100%would appearalongthediagonalinthetable.Movementtowardtheleftshowsthepercentageofratings thatwereraised,andmovementtotherightindicatesratingsthatwerelowered,defaulted,or withdrawn.(ThissectionprovidesanoverviewofratingtransitionsinUSPF.Formoredetails, pleaserefertotables23-27,40,and42-44.) RatingtransitiontablesprovideinsightintothegeneralratingtrendsofUSPFandeachsectorby showinghowdifferentratingcategoriesemergedattheendofagiventimeframe.Todetermine thepercentageofratingsthatchangeinagivenperiod,findtheratingatthebeginningofthe periodintheleftcolumn.Thevaluesinthatrowshowthepercentagesofratingsaslabeledineach columnattheendoftheperiod.Forexample,just0.85%of'AAA'ratingsinUSPFwereloweredin 2017,andallofthosethatchangedendedtheyearinthe'AA'category.Attheotherendofthe scale,'CCC'/'C'categoryratingswereraisedtothe'BB'category6.06%ofthetime,and3.03% wereraisedtothe'B'category.Another48.48%defaulted. Thetotalpercentagesofratingsthatwereraisedorloweredintootherratingcategoriescanbe computedbyaddingthevaluestotheleftorright,respectively,oftheintersectionoftherowand columnforeachrating.Forinstance,3.87%of'BBB'ratingswereraised(0.07%tothe'AA' categoryand3.80%tothe'A'category),and2.49%werelowered(2.00%tothe'BB'category, 0.14%tothe'B'category,and0.35%tothe'CCC'/'C'category). www.spglobal.com/ratingsdirect May 8, 2018 10

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The tax-secured category covers state or local government GOs, while 9,806. 0.00. 0.00. 2017. 9,852. 0.00. Marginal average. 0.00. 0.01. 0.01.
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