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

113 Pages·2012·2.26 MB·English

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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
[phone]
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.
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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.
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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.
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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
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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
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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.
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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.
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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.
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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).
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