Moody’s Investors Service will significantly upgrade municipal bond ratings across all sectors and rating categories. The upgrades are a result of Moody’s decision to use the same rating system for both muni and corporate bonds, and reflect the underlying quality of municipals and their exceptional record of performance.
The change is in response to a market increasingly dominated by “crossover” buyers of both tax exempt and taxable bonds who demand greater comparability between the scales used to rate the two types of credits. Moody’s made the change – breaking 100 years of tradition – after surveying almost 200 market participants.
Despite a default rate of less than 1%, Moody’s had previously used tougher standards in analyzing tax-free debt. Moody’s has been sued over its standards by Connecticut and criticized by officials in California for driving up borrowing costs for state and local governments. Regardless of these changes in Moody’s ratings policy, Connecticut’s attorney general vowed the state would continue its lawsuit against the firm and the two other major ratings services, according to Reuters.
Moody’s indicated that its preliminary analysis shows that most state and local general obligation ratings will see a two notch upgrade when the transition is completed. Enterprise ratings, comprised of revenue-bond type credits, will likely see a one notch improvement, while ratings at or above “Aa3” can be expected to see less upward movement than lower rated credits.
Transition begins next month
The transition is expected to begin in October 2008 and be completed by the end of January 2009. Initially, state government general obligations and related ratings will be adjusted along with the 50 largest local governments.
Health care and higher education will be transitioned in November 2008, followed by transportation related credits in December. Local government general obligations, water and sewer debt, and all remaining ratings are expected to follow in January 2009.
Joint rating committees composed of senior analysts from both public finance and corporate rating areas will be responsible for the rating decisions, insuring that ratings will properly reflect Moody’s assessment of risk on the same scale used for non-municipal ratings.
During the re-rating process, new issues coming to market will be rated according to the existing ratings of an issue’s sector. If that sector has yet to be upgraded, the newly rated issue will be assigned a rating reflecting existing criteria. When the sector is adjusted, that issue will see its rating rise as well.
These changes will better reflect the solid history of strong municipal bond performance and lack of defaults.