Municipal Bond Forum
How bond ratings are based
Q
Does the rating on an insured bond take into account the risk without the insurance or does it rate the likelihood that both the issuer and the insurer will default?
A
James A. Klotz responds:
In the past, bond ratings were invariably predicated on the strength of the bond insurer. This made perfect sense since the insurers’ ratings were always higher than the underlying rating. Obviously, there was no reason to purchase the insurance if it did not enhance the quality of the bonds.
Currently, some of the bond insurers’ ratings have been downgraded below that of the underlying ratings of the bonds. In these instances, the bonds would carry the rating of the underlying credit. If there is no underlying rating, the bond insurer’s rating would stand.
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