No change yet on non-federal ratings after S&P credit downgrade
The impact of New York-based Standard & Poor’s (S&P) Ratings Services’ lowering of the federal government’s long-term credit rating to AA+ with a negative rating outlook has not affected state and local government ratings or the ratings of top-rated U.S. nonfinancial corporate borrowers.
“S&P hasn’t made any changes to current city or state ratings as a result of the downgrade,” said Ola Fadahunsi, an S&P media relations manager for U.S. public finance. “Analysts will reexamine municipal ratings on a case-by-case basis when specific federal funding cuts are announced later this year,” Fadahunsi told Govpro.com.
Fadahunsi said debt ratings for state and local governments are reviewed periodically, rather than examined at any one particular time of the year.
In conjunction with S&P’s lowering of the federal credit rating, the agency lowered its ratings on three government-related entities (GREs): the Army & Air Force Exchange Service (AAFES), Marine Corps Community Services (MCCS), and Navy Exchange Service Command (NESC). In each case, the ratings went to AA- from AA, in keeping with S&P’s criteria on GREs.
S&P said the rating outlook on AAFES is stable, while the outlooks on MCCS and NESC are negative. “The stable outlook for AAFES reflects its better stand-alone credit profile than the other two GREs. The likelihood of extraordinary government support for these entities, in our assessment, would remain very high,” said S&P in a release.
Modest downgrade impact on federal contractors and businesses
In a press release, S&P said the U.S. credit downgrade does not currently affect top-rated U.S. nonfinancial corporate borrowers. “The sovereign downgrade will not affect the ratings or stable rating outlooks on the six U.S.-domiciled highest-rated nonfinancial corporate issuers,” the release stated. Those companies are Automatic Data Processing Inc., ExxonMobil Corp., Johnson & Johnson, Microsoft Corp., General Electric Co. and W.W. Grainger Inc.
The change in the federal credit rating and Congress’ recent action on the federal debt ceiling will only have a modest impact on the credit quality of most defense contractors, predict S&P analysts.
Congress’ recently enacted bill that increases the federal debt limit includes a $350 billion reduction to previously planned security-spending categories over the next 10 years. The security spending reduction, said S&P analysts, is spread among a number of security sectors, including the Department of Defense, and is mainly back-end loaded.
All six of the for-profit nursing home companies that S&P rates have been place on CreditWatch with negative implications as a result of the change in the federal credit rating.
Health care providers will be getting less federal support, say S&P analysts. “Significant cuts to Medicare are likely, either as part of a special Congressional committee’s $1.5 trillion in spending cuts or as part of the backup plan if the committee fails to come to an agreement. This would be in addition to cuts that the Affordable Care Act of 2010 already requires, such as a $155 billion cut in Medicare payments to hospitals over 10 years,” S&P said?
S&P recently staged a credit-rating-related teleconference on the effects of the downgrade. To hear an archived version of “The Impact of S&P’s U.S. Downgrade On Other Asset Classes,” call this number in the U.S.: 800-839-1152.