Moody's to Assign Global Ratings to Municipals

Via Naked Capitalism and MarketWatch comes Moody’s Senior Managing Director for Global Public, Project and Infrastructure Finance Group Laura Levenstein’s testimony to the House Financial Services Committee:

we have recently decided to assign global ratings to municipal issuers upon request and welcome additional market feedback on measures that would improve the overall transparency and value of Moody’s ratings systems.

Historically, this type of analysis has not been as helpful to municipal investors. If municipal bonds were rated using our global ratings system, the great majority of our ratings likely would fall between just two rating categories: Aaa and Aa. This would eliminate the primary value that municipal investors have historically sought from ratings – namely, the ability to differentiate among various municipal securities. We have been told by investors that eliminating that differentiation would make the market less transparent, more opaque, and presumably, less efficient both for investors and issuers.

In 2001, Moody’s met with over 100 market participants to understand their views on the need for and value of globally consistent ratings. The vast majority of participants surveyed indicated that they valued the municipal rating scale in its current form. Additionally, many market participants expressed concerns that any migration of municipal ratings to be consistent with the global rating scale would result in considerable compression of ratings in the Aa and Aaa range, thereby reducing the discriminating power of the rating and transparency in the market.

In 2006, we published a Request for Comment asking market participants whether they would value greater transparency about the conversion of our municipal rating system to a global rating system. We received over 40 written responses and had telephone and in-person discussions with many other market participants. Generally, the majority indicated that they valued the distinctions the current rating system provides in terms of relative credit risk, but that they would endorse the expansion of assigning global ratings to taxable municipal bonds sold inside the U.S.

In 2007, based on the above feedback and to further improve the transparency of our long-term municipal bond ratings, we

  • implemented a new analytical approach for mapping municipal ratings to global ratings, thereby enabling investors to compare municipal bonds to corporate bonds while maintaining the municipal scale that investors and issuers told us they valued;
  • published a conversion chart that market participants could use to estimate a global rating from a municipal rating; and
  • announced that, when requested by the issuers, we would assign a global rating to any of their taxable securities, regardless of whether the securities were issued within or outside the United States.

We are already re-evaluating our existing municipal ratings system and will be issuing a Request for Comment in which we will:

  • propose assigning global ratings to any tax-exempt bond issuance, including previously issued securities as well as new issues, at the issuer’s request beginning in May 2008;
  • clarify that the conversion table we published in our March 2007 report can beapplied to both tax-exempt and taxable municipal securities; and,
  • ask whether market participants would prefer a simplified conversion table that would make it easier to estimate a global rating from a municipal rating.

This is all rather odd … according to the critics, we desperately need a separate scale for structured finance, because it’s obviously misleading to use a global scale. And we need to put Munis on a global scale, because it’s obviously misleading to use a separate scale. It’s just odd.

And, Assiduous Readers will know without having been told, the investor universe is different for tax-exempt munis than it is for corporate bonds. Pension funds don’t invest in tax-exempt munis … they’re already tax-exempt. Mom & Pop invest in tax-exempt munis, at five grand a crack.

Barney Frank’s remarks, almost certainly made with full knowledge of the gist of the testimony, were reported on the March 12 Market Action Report.

David Einhorn will be happy about this proposed change, but I don’t know what the unintended consequences will be. I’m just extremely worried about this hint of political influence in credit rating agency decisions.

2 Responses to “Moody's to Assign Global Ratings to Municipals”

  1. […] municipal rating scale has been discussed often on PrefBlog – most recently in Moody’s to Assign Global Ratings to Municipals … after all, municipals in the States are cousins to preferreds in Canada in that they are […]

  2. […] reported on March 13 that Moody’s was going to assign Municipal credit ratings on its Global Scale, an idea I mocked at the time, with continued mockery in the post Municipal Ratings Scale: Be […]

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