Recent dislocations in the insured variable-rate demand obligation (VRDO) and auction-rate securities (ARS) markets have not been related to U.S. municipal issuer credit quality, according to Fitch Rating. Although they have resulted in higher-than-normal interest rate resets and unprecedented levels of puts and failed auctions, this has not necessitated any negative actions by Fitch Rating on the underlying ratings of its U.S. municipal VRDOs and ARS to date.
Fitch does not expect most of the VRDO and ARS municipal issuers it rates to be adversely affected as long as market conditions do not suffer further and marked deterioration. The rating agency has been analyzing the credit implications for insured VRDO and ARS issuers in the various municipal sectors, including health care. Higher-rated healthcare providers have ample cash and coverage to bear elevated interest expense for several months, said the agency. Lower-rated credits have fewer options and less financial cushion but do not appear to be highly stressed, in part because VRDOs and ARS are almost always part of a diversified portfolio of debt obligations. Fitch does not see any providers in immediate danger of being downgraded. Over the medium term, however, borrowers experiencing high capital costs and restructuring difficulties may face minor rating downgrades.
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