Moody's Investor Service appears to be in a quandary as to how to rate letter of credit (L/C)-backed US municipal bonds.

Over recent weeks, the ratings agency has downgraded L/C-backed municipal debt and the financial institutions that provide support in this market, but now says it is changing the way it views municipal bond risk.

Downgrades

Moody's recently downgraded 15 large L/C providers to the municipal bond market - including Citigroup, Goldman Sachs, Credit Agricole Corporate & Investment Bank, JPMorgan Chase, Morgan Stanley, Royal Bank of Canada and Societe Generale.

The ratings agency also cut ratings on US$64 billion of L/C reliant US municipal bonds (DC World News, 3 July 2012).

Upgrade

Now Moody's has upgraded to Aa1 nearly US$985 million of New York City long-term general obligation bonds.

The ratings agency says this is due to a change in how it rates the relationship between the banks providing the L/Cs - JPMorgan Chase and Bank of America in this instance - and New York City.

"Moody's has determined that there is a low level of default dependence between each bank and the City," according to a statement issued by the ratings agency.

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