U.S. public debt downgrades to outpace upgrades -Fitch, Moody's

October 28, 2013

NEW YORK, Oct 28 (Reuters) - Ratings agencies Moody's and Fitch both expect downgrades to U.S. public finance ratings to continue to outpace upgrades in the next quarter, reflecting weakness among many issuers despite the gradually improving economy.

For both rating agencies, downgrades outpaced upgrades in the third quarter of year, though the ratio of downgrades to upgrades moderated.

"Despite broader economic improvement, there are still pockets of concentrated credit pressure," Moody's Investor Services said on Monday. "As a result, we expect downgrades to continue outpace upgrades through the end of 2013 across most sectors."

Moody's said it issued 182 downgrades in the third quarter, versus 53 upgrades, representing a small sequential improvement over the previous two quarters.

Fitch Ratings downgraded 39 credits during the third quarter and said the number of downgrades exceeded upgrades by a ratio 1.7 to 1, compared with a ratio of 2.8 to 1 in the previous quarter.

"Negative actions are expected to remain elevated, as negative rating outlooks exceeded positive rating outlooks," Fitch said. "However, the ratio of negative outlooks to positive outlooks has been slowly decreasing for the last eight quarters and is at its lowest level since the third quarter of 2009."

Ratings agencies have different methodologies for rating debt, and the number and type of issuers they cover can also vary. As a result, the big three agencies do not necessarily provide a like-for-like comparison.

In contrast to Fitch and Moody's, Standard & Poor's Ratings Services issued more upgrades than downgrades in the third quarter. It said it expected that trend to continue, but that the number upgrades to downgrades could ease due to headwinds, such as federal government spending cuts and dysfunction in Washington.

Standard & Poor's said the increase in upgrades partly reflected a revision of its ratings criteria. In September, the agency released changes to its criteria for assessing local governments. It said at the time that it expected the ratings for 30 percent of the 4,000 it evaluates to rise as a result.

Standard & Poor's said it made 2.81 upgrades for each downgrade in the third quarter, compared with a ratio of 2.05 to 1 in the second quarter. The number excludes the housing sector.

The agency noted that there have been 14 defaults so far this year, the highest since it started tracking defaults in 1986. It said the elevated number of defaults reflected a widening of the gap between strong and weak credits, but said the number was "inconsequential from a statistical standpoint."