Bloomberg News

Municipal Bonds Backed by Federal Highway Funds Face Downgrades

August 20, 2011

Aug. 20 (Bloomberg) -- U.S. state and local government bonds backed by federal highway funds may face rating cuts because of congressional budget fights, Standard & Poor’s said.

Standard & Poor’s said the possible expiration of the federal gasoline tax after next month or a reduction in U.S. public-works spending might hurt the ratings of so-called Garvee bonds. Those bonds raise money from investors and use federal funds to repay the debt, allowing officials to get an advance on transportation money expected in future years.

S&P lowered its rating of U.S. credit Aug. 5 after a congressional battle over raising the debt limit pushed the government near default and didn’t cut spending as much as necessary. S&P downgraded more than 11,000 municipal bonds directly linked to federal spending, such as those paid off with income from Treasury bonds. Garvees, or grant-anticipation revenue vehicles, weren’t affected.

“There are several potential risks, that, if realized alone or in combination, might cause us to reevaluate the ratings on some or all our Garvee bonds,” S&P said in a report yesterday. “Diminished funding, a delay in extending the gasoline tax, or delaying continuation of vital surface road programs could all have an impact on our ratings.”

A cut might raise the price of transportation projects if investors demand higher returns for holding the debt. The S&P downgrade earlier this month hasn’t had that effect because demand for tax-exempt municipal debt and Treasuries has soared, depressing yields, as investors opt for safer assets amid market turmoil.

--Editors: Pete Young, Ted Bunker

To contact the reporter on this story: William Selway in Washington at wselway@bloomberg.net

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net


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