After we have these facts we’ll assess the impacts on U.S. Public Finance credits, in both a broad and acute nature and I’m not just talking about the ‘AAA’s here. We’re talking about all of our credits on a case-by-case basis.
Valerie White: Certain U.S. Public Finance housing issues rely on guaran- tees, enhancements, or insurance from entities that either have direct or implied support from the U.S. Government.
In housing, the ‘AAA’ issues that were downgraded as a result of ratings downgrades to the U.S. government, Fannie Mae, or Freddie Mac include issues supported by mortgage-backed security enhancements issued by Ginnie Mae, Fannie Mae, or Freddie Mac, direct-pay credit instruments issues by Fannie Mae or Freddie Mac, and issues backed by single-asset mortgages that are insured by the Federal Housing Administration, also known as FHA.
In addition, the issue credit ratings of certain public housing authorities were downgraded. Now, as Laura mentioned the GRE criteria earlier, because of the previous ‘AAA’ rating on the U.S. sovereign, these particular public housing authorities had bene- fited from a one-notch up upgrade based on the moderate likelihood of support of the U.S. government in extraordinary circumstances.
Finally, ‘AAA’ housing finance agency parity bond programs with mortgage col- lateral insured by FHA were placed on CreditWatch with negative implications.
In line with our criteria, we will be reviewing each master bond program, assuming that this counts as value to the FHA-insured mortgages, and deter- mining if there is, in our view, sufficient overcollateralization in those bond pro- grams to curb our stress assumptions.
Some of our discounts and related stress assumptions also will be applied to mortgage collateral with better administration or rural housing devel- opment insurance.
Peter Murphy: Within the infrastruc- ture group, we rate over 1,000 public utilities and, for the most part, these are
monopolies that provide an essential service and are funded by user charges.
So we do not expect any credit deterio- ration in this sector related to changes in the sovereign rating. However, two elec- tric utilities are government-related enti- ties, or GREs, as Matt Albrecht discussed, and in conjunction with the sovereign downgrade the debt of the Tennessee Valley Authority (TVA) and debt sup- ported by payments from the Bonneville Power Administration were lowered one notch each to ‘AA+’ and ‘AA-’ respec- tively due to the interplay between these two GREs and the federal government.
The outlook for TVA’s bonds is nega- tive, while the outlook for debt sup- ported by Bonneville is stable, since its stand-alone credit profile, which is ‘AA-’, could withstand a potential decline in the sovereign rating, whereas TVA’s would not at this point.
On the transportation side, the key focus going forward will be on Garvees, or grant anticipation rev- enue vehicles. (Individual issuers, usu- ally states or state departments of transportation, issue Garvees; federal highway and transit aid to cities or states is pledged to the bonds.) At this time, we are not taking any rating action on 25 Garvee ratings, but we are monitoring action in Washington regarding continuation or reautho- rization of the safety loop program.
Now due to differences in legislative proposals from the House and the Senate, the funding amount and the length are unpredictable at this point. However, we expect Congress to pro- vide extensions and continuing appro- priations for transportation programs based on historical precedent. For instance, since 2009 Congress has extended funding of highway and transit aid 17 times.
Ronald Barone: The sovereign down- grade did not affect the ratings or the stable outlooks on the six U.S. domiciled highest-rated corporate issuers, including Automatic Data Processing Inc. (ADP), rated ‘AAA’, ExxonMobil Corp., rated ‘AAA’, Johnson & Johnson (J&J), also ‘AAA’, Microsoft Corp., ‘AAA’, General
Electric Co. (GE), ‘AA+’ and W.W. Grainger Inc., also rated ‘AA+’.
As Laura had alluded to, companies with the least exposure to country risk include those that are globally diversi- fied and generally export oriented. Given the global and diverse business lines and significant financial strength of Exxon Mobil, J&J, Microsoft, and GE, we did not downgrade those entities.
They also enjoy excellent business risk profiles with high end market diversity, diversity of products and service lines, a track record of solid profitability with minimal or modest financial risk with significant cash flow from various business lines, and sub- stantial liquidity.
Although there’s no direct impact on those credits, the ratings on these com- panies may be impacted. At least a por- tion of the work that they do, or the business that they do, with the U.S. has some minimal impact. If that should grow, then there could be an impact on the companies themselves. There’s also no current impact on our ratings or rat- ings outlooks on ADP (‘AAA’) and Grainger (‘AA+’).
Although most of the revenues from these firms come from within the U.S. and they are less diversified by product line and geographic busi- ness mix than the companies I previ- ously mentioned, they do enjoy high customer and end market diversifica- tion, and their revenues held up very, very well during the most recent recession. They have minimal reliance on the public sector and their set of products is relatively demand and elastic, again alluding to the criteria that Laura Feinland-Katz had previ- ously gone over.
As was noted by other folks here, the ratings on GREs in the U.S. corporate sector were also lowered. These included what we call our PX, or the procurement exchange, companies or entities, and that’s the Army & Air Force Exchange Service, and we low- ered that to ‘AA-’ from ‘AA’.
We also lowered the Navy Exchange Service Command again, to ‘AA-’ from ‘AA’, and the Marine Corps Community
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