US negative outlook from S&P hits tobacco bonds

The negative outlook bestowed on the United States’ AAA rating by Standard & Poor’s Ratings Services spread on Thursday to defeased tobacco bonds issued by states and local governments.

The rating agency said it revised the outlook on portions of 15 tobacco securitizations rated AAA due to their defeasance with U.S. Treasuries or U.S. agency securities to negative from stable in conjunction with its outlook revision for the United States on Monday.

Defeased bonds are those that have been secured by another asset, often to ensure the issuer has sufficient funds to pay the bonds when they become due.

On Wednesday, S&P assigned a negative outlook to a slew of other refunded municipal bonds that are rated AAA because they are secured by U.S. Treasuries or U.S. agency securities.

Muni issuers use State and Local Government Series securities — known as “slugs” — which are special low-interest Treasury securities — to invest proceeds from their refunded bond issues.

Through early April, the U.S. Treasury had sold $47.4 billion in slugs to muni bond issuers during the fiscal year that began last October.

S&P’s list of bonds that now carry a negative outlook and that were originally backed by states’ share of a 1998 nationwide settlement with U.S. tobacco companies, included issues from Wisconsin, Iowa, California, New Jersey, and Virginia. For a list of affected issues, click on [nWNA6805].

On Monday, S&P revised its U.S. credit outlook to negative from stable. The agency said President Barack Obama and members of Congress had to slash the country’s deficit or face the potential loss of the triple-A credit rating on U.S. debt.

S&P said there was a one-in-three chance it would eventually cut the rating, which would drive up the cost of borrowing and chip away at the status of the United States as the world’s most powerful economy.

The rating agency also noted that it does not tie underlying ratings on state and local governments to that of the United States and as a result, existing outlooks on those that carry triple-A ratings on their own will not change because of Monday’s revision for the federal government.

By Karen Pierog

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