Sept 30 (Reuters) - Funding for hospitals, states and other issuers in the $3.7 trillion U.S. municipal bond market would be jeopardized if Congress does not raise the federal debt limit by the Oct. 17 deadline, Moody's Investors Service said on Monday.
Without a deal on the debt ceiling, the U.S. Treasury will have only $30 billion every day to pay bills that sometimes total twice that amount for daily expenditures, Moody's said.
"Issuers would also likely face higher borrowing costs, and market access would be challenging, particularly for issuers with thin liquidity and a need to refinance debt or access the short-term note market for cash-flow purposes," Moody's said.
Most issuers have already prepared for an impasse, setting aside funds or scheduling payments to protect against possible delays or reductions in the transfer of federal funds, the credit rating agency said.
Hospitals, especially those that treat many poor patients, would take a big hit because they rely so heavily on Medicaid and Medicare funds.
Children's Hospital Central California, rated A1 with a stable outlook, gets 70.7 percent of its revenue from Medicaid reimbursements - the highest percentage of any hospital. All 10 hospitals that rely the most on Medicaid are children's hospitals, the Moody's report said.
A potential federal government shutdown, which would happen on Monday at midnight if Democrats and Republicans fail to agree on a spending bill, could also hit some muni bonds, although the impact would likely be limited.
Only specific bonds will be directly affected by any cut in federal funding stemming from either a prolonged government shutdown or a lack of a debt ceiling extension, according to Moody's.
Moody's rates several billions of dollars of municipal bonds that are backed by federally appropriated funds such as transit GARVEES - grant anticipation revenue bonds - which might be affected. Moody's said some of the debt payments on these bonds will continue because they will be at least partially covered by existing and future reserves.
If the debt ceiling is not extended "it could mean a variety of things we think it would be quite broad reaching, although reserves from state and local government taxes will mitigate that," said Nick Samuels, senior credit officer at Moody's.
Among other municipal debt that would be affected, Moody's rates about $10 billion of military housing bonds. While the Oct. 1 debt service payments on the bonds may already have been made, future payments could be made from debt service reserves.
Moody's also rates about $2.3 billion of transit GARVEES, whose first debt payment will be on Dec. 1, and around $1 billion of public housing authority bonds.