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S&P Downgrades 11,500 Munis, Many to Keep AAA More than 11,000 municipal bonds tied to the federal

government lost their AAA r atings from Standard & Poor s, including housing securities and debt backed by lea ses, after the company downgraded the U.S. S&P assigned AA+ scores to about 11,500 securities in the $2.9 trillion municipa l bond market, according to data compiled by Bloomberg. They include school-cons truction bonds in Irving, Texas; debt backed by a federal lease in Miami; and a bond series for multifamily housing in Oceanside, California. Yesterday s cuts also affected debt backed by Fannie Mae and Freddie Mac and so-ca lled pre-refunded bonds, which are paid off with income from Treasuries bought w ith borrowed funds. No state general-obligation ratings were changed, and S&P sa id many borrowers should remain AAA. They made it clear that there are going to be states that can continue to be AAA, and that was a concern, said Tom Kozlik, director of municipal credit analysis f or Philadelphia brokerage Janney Montgomery Scott. State and municipal governments that depend less on the national government for revenue and that manage their own books well enough to weather declines in feder al funding may retain AAA ratings, S&P said. The company didn t name such states o r municipal governments. The credit-rating company still rates the general- obligation debt of nine state s AAA. The country s decentralized governmental structure calls for an independent r eview of state and local government credits, 3.9 percent of which have AAA ratin gs, S&P said. Traditional Warning Kozlik said S&P would likely telegraph any state rating cuts by first changing i ts outlook, as is traditionally done. It s unclear how federal budget cuts agreed to last week in an agreement to raise the U.S. borrowing limit will affect indiv idual states since the details have yet to be hammered out by Congress. We really have to see what it is they will be facing, he said. Officials in AAA rated Maryland and Virginia, whose economies are bound to the f ederal government, said yesterday they hadn t heard from S&P since the U.S. downgr ade and didn t think any moves were imminent. I would think S&P would want to take some time, said Patti Konrad, Maryland s direct or of debt management. We haven t heard anything. Ripple Effect Ric Brown, Virginia s finance secretary, said his office hasn t spoken to S&P and th at any move affecting the state would be based on how federal budget cuts ripple through the economy. It s probably going to take a little bit of a while until they know specifically wh at s on the table to assess that, he said. S&P, in lowering the U.S. on Aug. 5 from AAA, cited politics in congressional ne gotiations to increase the federal debt ceiling and said lawmakers failed to red uce spending enough. Moody s Investors Service and Fitch Ratings affirmed their to p ratings on Aug. 2, the day President Barack Obama signed the bill raising the debt ceiling and avoiding a default.

For the municipal market, the key is supply and demand, more than ratings downgrad es, said Ed Reinoso, chief executive officer of Castleton Partners in New York, which manages about $250 million for individuals. The S&P action itself was almost cosmetic, sn t seem to have much impact. he said in a telephone interview. It doe

Falling Sales Municipal issuance has fallen amid the U.S. debt-ceiling impasse. Sales planned for the next month total $3.82 billion, the lowest 30-day supply since May 27, a ccording to data compiled by Bloomberg. The sales slump and signs of a slowing economy helped drive yields on top-rated 10-year tax-exempt debt to 2.39 percent, the lowest since October, according to a Bloomberg Valuation index. Mutual funds required to invest in AAA bonds will be most affected by the munici pal downgrades and may be forced to liquidate some holdings, said Bud Byrnes, ch ief executive officer of Encino, California-based RH Investment Corp.. They will have a hard time replacing that yield, he said.

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