Bridgeport gets junk rating from Moody's; banks in Northeast receive gloomy forecast.

NEWPORT, R.I. -- Moody's Investors Service yesterday downgraded the general obligation ratings for Bridgeport, Conn., to below investment grade levels.

About $71 million of the city's uninsured bonds were dropped to B from Baa. The $33.5 million 1989 Series B issue was dropped to Ba from A; this deal is rated a shade higher due to a special state-supported reserve fund, the agency said.

Moody's suspended Bridgeport's ratings June 6, when the city filed for protection under Chapter 9 of the Bankruptcy Code. Since then, indications from city leaders have not been optimistic, Moody's said. "Subsequent actions and statements by the city and state only compound the uncertainty of the bankruptcy filing," Moody's said in a press release.

For the time being, Moddy's does not see signs of a disruption in debt service, but the rating agency was compelled to lower the city to below investment grade because of "the assaultive nature of the city's filing on basic creditors' right" and the fact that Chapter 9 means a technical default for many of the bonds.

Moody's also said the B rating gave no credence to Bridgeport's statements that bondholders will be well-treated. "To the contrary," the agency said, "further unanticipated actions by the city may occur."

The $33.5 million of 1989 bonds got a "higher rating because the state has pledged to support that fund, and we expect the state to pay," said Joan Dougherty, manager of New England ratings at Moody's.

The $102.85 million of outstanding insured bonds remain at the Aaa level, Moody's said. Originally, $118.44 million of insured Bridgeport GOs were sold, but about 13% has matured.

Financial Guaranty Insurance Co. has the most exposure to the bankruptcy city, at $111 million of total debt service; Financial Security Assurance, through a reinsurance agreement with FGIC, has the second largest exposure at $9.6 million; AMBAC Indemnity Corp. has $7.8 million; and Municipal Bond Investors Assurance Corp. has about $4 million on the line.

The developments in Bridgeport were closely followed in Newport, where some 270 municipal finance professionals gathered for the 22nd Annual Conference of Northeast State Treasurers.

"My concerns with Bridgeport is that it's going to shake investor confidence in otherwise creditworthy state and local bonds," said Milton Wells, director of the National Association of State Treasurers. Bridgeport's declaration of bankruptcy has tarnished all municipalities in the eyes of some investors, Mr. Wells said.

One Connecticut state official close to the situation said Mayor Mary C. Moran's assertions that bankruptcy proceedings will protect bondholders would be moot once in court.

The Mayor's assurances, the official said, would apply only during the "pendency" of the city's bankruptcy petition -- the period leading up to its acceptance by the court. After that, Bankruptcy Judge Alan H.W. Shiff alone would decide the fate of debt service. The judge has slated hearings for July 16.

Another concern confronting public finance officials in this seaside town was the condition of the banks where they deposit municipal funds. James V. McFarland, deputy regional director of Federal Deposit Insurance Corp., predicted that 10% of the more than 600 banks in New England will fail over the next year and a half.

And worse, New England's banking system decay probably soon will infest the mid-Atlantic states, Mr. McFarland said. The only glimmer of hope is that for many banks in the recession-wracked Northeast, the worst may be over, he said.

"It would appear that the banks in New England have recapitalized their troubled portfolios," Mr. McFarland said. But in the mid-Atlantic, from New Jersey down to Maryland, it will require more time to come to terms with the problems.

"The numbers that are starting to show up in the mid-Atlantic states are the numbers that were in New England a year and a half ago," he said.

Mr. McFarland declined to estimate how many mid-Atlantic banks will fail before the industry shakeout works its way through the region.

John F. Wallace 3d, a managing director at Bank of Boston, concurred with the the assessment. "While there will be additional failures in the Northeast corridor, the banks in the Northeast are reserved well, as opposed to their counterparts in the mid-Atlantic and other parts of the country."

Mr. McFarland said that the roughly 60 banks that he expects to fail in New England over the next 18 months are already so close to being seized by the federal government that there is no turning back.

He said that the forecast includes some larger institutions that have "over a billion dollars" in deposits.

Mr. McFarland would not disclose the names of any troubled institutions, where municipal officials stand to lose deposits in excess of $100,000 per account. Instead, he exhorted the treasurers in attendance to exercise care in selecting banks.

"We're relying on you people to make sure that we don't run into a situation where a bank fails and significant municipal funds are lost," he said.

Municipal officials of several towns in Massachusetts lost money after the December failure of the Capitol Bank & Trust Co., near Boston. And when the Bank of New England became insolvent and was seized Jan. 6 by federal regulators, municipalities also stood to lose money.

Most of the vulnerable Bank of New England deposits were public. But the federal government's adherence to the "too big to fail" policy -- coverting deposits exceeding $100,000 -- saved municipalities, Mr. McFarland said.

Several states in the Northeast, where collateral requirements for public deposits have been rare, are now trying to craft rules to ensure that public money can survive the fluctuations of the banking industry.

Here in Rhode Island, for example, lawmakers last week passed a bill mandating full collateralization at banks that fall below certain federal standards.

According to state treasurer Anthony J. Solomon, the new law, which has been signed by Gov. Bruce G. Sundlun, "gives some comfort to people in the state."

Rhode Islanders' faith in deposit insurance was shaken after the failure of a private insurer called the Rhode Island Share and Deposit Indemnity Corp. "They're losing confidence even in the FDIC banks, which are having no problems," Mr. Solomon said. "This gives them a second layer of security."

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