BOSTON - A day after Orange County, Calif., declared municipal bankruptcy, Standard & Poor's Corp. and Moody's Investors Service acted on the county's ratings.
Moody's suspended the ratings on all f the uninsured, unenhanced debt obligations of the county, while Standard & Poor's downgraded the issues to a speculative grade CCC from AA-minus. The rating changes cover about $1.6 billion in outstanding debt.
Fitch Investors Service does not rate the county.
Standard & Poor's said it cut the rating based on the county's decision to file for Chapter 9 bankruptcy protection after suffering huge losses in the Orange County Pooled Investment Fund.
Standard & Poor's also revised the county's CreditWatch status to developing from negative, saying that the reason for the revision was due to "the lack of specific detail" about how the county plans to resolve its fiscal crisis. Rating officials have summoned county executives to meet with them because of the dearth of information about the county's true financial shape.
Standard & Poor's uses the CCC rating to show that an issuer has a "currently identifiable vulnerability to default, and is dependent upon favorable business, financial, and economic conditions to meet timely payment of interest and repayment of principal. In the event of adverse ... conditions, it is not likely to have the capacity to pay interest and repay principal."
Moody's, meanwhile, suspended Orange County's Aa1 rating, as well as ratings on six separate issues of tax and revenue anticipation notes, an issue of airport revenue bonds, a refunding done by the Orange County Civic Center Authority, two issues of taxable pension obligation bonds, two certificate of participation deals done by the Public Facilities Corp., an issue of county-backed notes, and a COP deal sold by the California Financial Services.
Filing for bankruptcy is considered a last resort in resolving a municipal financial crisis. In 1991, Bridgeport, Conn., tried to file for Chapter 9 protection, but a new mayoral administration rescinded the filing.
Orange County "crossed a big line in my opinion," said Richard Larkin, a director at Standard & Poor's. "Filing for bankruptcy is going to have a longer and more severe impact on the county than just defaulting on debt obligations."
Larkin said that by filing for municipal bankruptcy,the county as sent an alarming message not only to the bondholders but to other parties.
"Bankruptcy is basically saying hat anyone who has any financial dealings with the county is now at risk," Larkin said.
Prior to the crisis, Orange County had been one of the fiscally strongest municipalities in California. In a release, Standard & Poor's said that a diverse economy, strong tax base, low debt burden, and historically strong fund balances give the county a firm financial under-pinning.
However, the unrealized losses from the pool, which many now estimate at $1.5 billion, have overshadowed all he fiscal positives, Standard & Poor's said.
In a release, Moody's said that because of the newness of this type of municipal bankruptcy, it had little evidence to draw upon in determining how the action would affect the rights of the bondholders.