Moody's Poised for Big Fiscal Cliff Call

NEW YORK ( TheStreet) -- Ratings agency Moody's is poised to make a big call on how the 'fiscal cliff' and presidential elections will impact its rating of the U.S. government's debt and the bonds of corporations with heavy government sales or regulation.

In a set of Monday research notes, Moody's outlines how the presidential elections and the prospect of a fiscal cliff standoff may impact a range of debt ratings spanning the U.S. Treasury to the healthcare, defense and oil and gas sectors - but the agency isn't yet ready to take a stand on potential downgrades and upgrades just yet.

According to Moody's, the re-election of President Barack Obama gives little certainty over the existential issues that hang over the government's finances, notably a potential 'fiscal cliff' of budget cuts and tax increases scheduled for early 2013 and an increase to the nation's debt limit, which some forecasts indicate may be reached by the Spring.

Already, Moody's has played a slow-hand in deciding whether to downgrade the U.S. government's debt ratings, after competitor Standard & Poors cut the U.S. from AAA in the wake of a last minute August 2011 deal to raise the government's debt limit and stave off a default.

In September, independent ratings firm Egan Jones cut the U.S. government's debt rating one level to AA-, noting how the Federal Reserve's easing efforts may hit the U.S. dollar and drive up inflation. On Aug. 5, S&P was the first agency to cut the government's debt rating, lowering it to AA+ as a result of what's now known as a 'fiscal cliff' that falls short of what's needed to stabilize the government's medium-term debt issues.

Moody's sees the fiscal cliff and the government's debt with a little more optimism. The agency said in September it may downgrade the U.S. debt rating from Aaa - its highest rating -- to Aa1 by 2014 if budget negotiations during the 2013 Congressional legislative session fail to stabilize the federal debt to GDP ratio. Currently, Moody's holds the U.S. government's Aaa rating with a "negative" outlook, signaling that a rating review would likely yield a cut.

After the election returns put Obama in the White House for a second term as president, the agency is maintaining its language on the government's debt outlook and emphasizing that it would cut ratings were lawmakers to broker a deal that doesn't provide a credible path to debt reduction.

In fact, were lawmakers to broker a fiscal cliff deal that kicks the can down the road on debt reduction without outlining specific budget stabilization plans, Moody's hints at a possible downgrade prior to 2014.

Interestingly, as in its September assessment, Moody's sees the prospect of a ratings benefit if the U.S. were to fall off the fiscal cliff.

" If the "fiscal cliff" strategy is adopted to achieve debt stabilization - involving a large, immediate fiscal shock that would improve government finances in the short term but likely result in recession and higher unemployment - we would maintain our Aaa rating with a negative outlook and await evidence that the economy could rebound before considering a return to a stable outlook," writes Steven A. Hess and Bart Oosterveld of Moody's in a Monday note.

For the defense, healthcare and oil and gas industries, Moody's sees the prospect of a negative impact from budget talks and the election of President Obama. Ratings analyst Russell Solomon said on Monday, that a win by Republican candidate Mitt Romney might have tempered defense budget cuts and asses that Obama's election could pressure the ratings of Lockheed Martin ( LMT), Northrup Grumman ( NOC), General Dynamics ( GD), Raytheon ( RAY) and Boeing ( BA).

"President Barack Obama's victory over Mitt Romney in last Tuesday's US presidential election is credit negative for defense companies because the US remains the industry's biggest customer by far (with defense outlays accounting for 40%-45% of global military spending, roughly 5x the amount of China, which is the second-largest) and the Obama administration already has in motion a major shift in strategic priorities that will meaningfully pare spending," writes Solomon.

Stephen Zaharuk and Michael Levesque of Moody's Healthcare coverage see Obama's re-election as reason to believe the key provisions of the Affordable Care Act -- otherwise known as 'Obamacare' - are likely to be implemented, with negative implications on the profitability and revenue of insurers. Pharmaceutical giants and medical device companies may also share in the pain as a result on greater regulation and restrictions on government supported spending.

Still, Moody's sees a possible benefit to hospital operators like HCA ( HCA), Community Health Systems ( CHS) and Tenet Healthcare ( THC), as a result of fewer uninsured emergency room visits that can create bad debts.

In the oil and gas sector, Moody's expects the re-election of Obama to pressure industry ratings because tax reforms to industry giants may outweigh the eventual approval of the Keystone XL pipeline between the U.S. and Canada. "We think the Obama administration will approve the Keystone XL pipeline eventually, but tax reforms, if Congress agrees, could reshape much of the energy industry," write Moody's analysts. The agency also expects greater regulation on the hydraulic fracking industry and a focus on automotive fuel-efficiency as other potential post-election headwinds.

Investors should look at Moody's Monday research notes and updated language surrounding the big fiscal matters of the day as reason to prepare for a widespread set of actions as lawmakers hammer out post-election policy.

For more on the fiscal cliff, see why a housing recovery could blunt a partisan standoff .

-- Written by Antoine Gara in New York

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