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Moody's: auction rate market presses some ratings
Moody's Investors Service said in a report that a prolonged disruption in the auction rate securities market could hurt ratings for some securities.
"The auction rate market has been severely disrupted in recent days by the decisions of several broker-dealers to curtail and, in some cases, withdraw their voluntary support in the form of liquidity for auction rate securities," Moody's vice president Henry Shilling said in a written statement.
"This has been happening in spite of the fact that the underlying credit quality of issuers remains strong in the short term even as interest expenses have spiked up," Shilling noted.
Recent failures in the auction rate market have hurt ratings for student loan-backed securitizations in the intermediate term and for certain public finance issuers in the long term, Moody's noted.
Auction rate securities typically have a long-term nominal maturity that can extend to 25 or 30 years but have interest rates that are reset periodically. According to the Moody's report, roughly half of the estimated $328 billion market is made up of tax-exempt, and some taxable, issues of state and local governments, not-for-profit hospitals, colleges and universities.
"Many issuers can manage the higher interest rates they may have to pay on their auction rate securities because interest expense is not a high percentage of their operating costs," said William Fitzpatrick, a Moody's vice president. "But there may be some issuers with more narrow debt service coverage that will experience rising budgetary stress if the high rates persist for the medium or long term."
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