Capital Markets

Moody’s Mind-Shift on Munis

The ratings agency goes halfway in answering municipalities' plea for rating their debt the same as corporate bonds.
Sarah JohnsonMarch 21, 2008

Moody’s Investors Service will rate municipal bonds on the same scale as corporate debt starting in May.

The catch? Public-sector entities will have to ask for such treatment and the rating agency will continue to assign its municipal scale rating to all tax-exempt securities. That may not sit well with the leaders of states, cities, and towns who consider the current ratings system “dangerously misleading and misguided,” in the words of Connecticut’s state Attorney General Richard Blumenthal.

At a recent meeting of the House Financial Services Committee, Blumenthal said the dual rating system imposed on municipalities is costing taxpayers millions of dollars in unnecessary interest and insurance. While they pay similar costs, the different rating system under which they operate imposes lower credit ratings on them than corporations get, he contended.

Earlier this month, the credit-rating agencies also heard a mouthful from the finance executives of municipalities, who have been frustrated by the recent lack of investor interest in their securities amid the credit crisis and low investor confidence.

In response to that criticism, Moody’s released a document this week outlining its plan for giving municipalities “global scale ratings,” which were once called “corporate equivalent ratings.” In Moody’s announcement about its changes for tax-exempt debt, the agency acknowledged that its decision stems from the “significant amount of feedback from municipal issuers, investors, and intermediaries.” Until now, Moody’s has assigned its global scale ratings to only about 20 municipal issuers.

The municipal bonds have been unfairly held to a higher standard than corporate bonds even though municipalities are less likely to default on their debt, according to Bill Lockyer, California’s state treasurer. “The disparate treatment means states, cities, counties, and other governmental entities have a harder time than corporations getting their bonds rated triple A,” he said at the congressional hearing last week. “Put another way, municipal bonds are more likely than corporate bonds to receive a rating lower than triple A.”

Indeed, investors’ recent uncertainty over municipalities’ debt holdings prompted an outcry by public-sector executives for the rating agencies and regulators to institute changes. And there’s been response: for instance, the Securities and Exchange Commission issued guidance last week that clarified that municipalites can bid on their auction-rate securities as long as they provide proper disclosure and aren’t breaking any covenants with bondholders.

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