Fitch: U.S. Public Finance 2006 First-Quarter Rating Actions and Outlook

NEW YORK--(BUSINESS WIRE)--April 24, 2006--During the first quarter 2006, Fitch upgraded 15 and downgraded 16 US public finance credits for an upgrade-to-downgrade ratio of 0.94:1, an improvement over fourth quarter 2005 which had an upgrade-to-downgrade ratio of 0.57:1. On a par basis, the upgrade to downgrade ratio was 2.1:1 with upgrades of two very large issuers skewing the ratio: $4.45 billion of general obligation bonds issued by the State of Hawaii were upgraded to 'AA' from 'AA-', and $508.8 million of lease-backed debt issued by the city and county of San Francisco were upgraded to 'A+' from 'A'. The largest downgraded credit was nearly $2 billion of Los Angeles Department of Water & Power water and sewer revenue bonds lowered to 'AA' from 'AA+' due to declining liquidity levels. Other notable rating changes include upgrades to Alaska International Airports System (AK) to 'AA-' from 'A+', Riverside County (CA) to 'AA-' from 'A+', and Orlando Regional Healthcare Systems (FL) to 'A' from 'A-'; downgrades included Memphis (TN) to 'A+' from 'AA-' and New Haven (CT) to 'A-' from 'A'.

During the first quarter, the list of credits on Rating Watch Negative decreased by four to 45. By contrast, there were only three credits on Rating Watch Positive, an increase of one. The disproportionate number of credits on Rating Watch Negative is still largely due to the after effects of Hurricane Katrina. As of March 31, there were 19 credits within the affected region on Rating Watch Negative, although St. Tammany Parish Wide School District No. 12, LA and four credits from Jefferson Parish, LA were subsequently removed from Rating Watch Negative on April 11, 2006. Besides the still volatile credits from the Gulf Region, Fitch includes four San Diego and five Detroit-related credits on Rating Watch Negative. The three credits on Rating Watch Positive were Ty Cobb Healthcare System, GA, Central Valley Financing Authority, CA, and Sacramento Cogeneration Authority, CA.

The ratio of Positive-to-Negative Rating Outlooks improved to 0.8:1 (105 on Positive and 85 on Negative Rating Outlooks) as of March 31 from 0.7 at December 31, 2005, with two new Positive Rating Outlooks in the health care sector (Fletcher Allen Health Care, VT and Jefferson Health System, PA) and two in the tax-backed sectors (cities of San Francisco and Anaheim). One airport credit, Dallas-Fort Worth International Airport was assigned a Positive Rating Outlook during the first quarter. However, transportation credits, specifically airports, continue to weigh down the Rating Outlook ratio; the transportation sector on its own has a Positive-to-Negative Rating Outlook ratio of 0.14:1, as a number of Fitch-rated airports could still be adversely affected by the restructuring processes of major airlines including Delta and Northwest.

On April 13, 2006, Fitch assigned a Stable Rating Outlook to the state sector. In addition Fitch assigned Stable Rating Outlooks to most of the US states; the exceptions to this were California, which was assigned a Positive Rating Outlook, and Louisiana, Michigan, and Illinois, which were assigned Negative Rating Outlooks. The Stable Rating Outlook for the sector reflects a favorable economic picture and continued positive revenue performance. Revenue growth, which in many situations has been fueled by the strength of corporate income, capital gains, and real estate, is expected to be less robust in the future, however. Reserves are being rebuilt despite rapid increases in health care and pension costs, continued education funding requirements, and other pent-up demands. Continued weakness in manufacturing and the slowing in real estate are not expected to derail economic recovery, although their effects may be more pronounced in certain states. Nonetheless, with revenue gains expected to moderate, fixed costs on the rise, mounting pressures for tax relief in many states, and expanded debt and infrastructure requirements, states will continue to face financial pressures.

The national economic trend remains stable, as overall February 2006-over-February 2005 total employment grew by 2.23%, a slightly higher figure than 2.02% recorded from February 2004 to February 2005. The gross domestic product grew 3.2% in 2005 vs. 2.8% in 2004. February 2006 personal income and consumption grew 5.6% and 10.6% respectively from February 2005, the disparity between income and consumption due to negative savings and an increase in personal debt to 35% of net household income. However, consumption is likely to slow in 2006 as Fitch predicts continued tightening in monetary polices and a slowdown in the housing market. Even though 1,716,000 housing units were started in 2005, the 6.5% increase from 2004 marks a slowdown from the 7.5% growth rate of housing unit starts in 2004. The United States economy is expected to slow moderately this year, although the outlook remains within the realms of a 'soft landing' and should not have significant adverse ramifications on public finance credits.

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