PrefBlog

Surprise, surprise.

PrefBlog 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 Careful What You Wish For!

Now Bloomberg is reporting:

The difference in borrowing costs for top-rated debt on the current municipal grading scale and A rated tax-exempt bonds in the $2.66 trillion municipal market has widened, rather than narrowed, leading up to when the new higher ratings take effect. The so-called spread has expanded to an average 60 basis points this month, according to Lehman data. A basis point is 0.01 percentage point.

Interest costs on 15-year debt for Nebraska’s largest public power utility, rated A1 on Moody’s municipal scale, have more than doubled from a year ago relative to top-rated tax-exempt bonds, climbing to 52 basis points, data compiled by Bloomberg and Municipal Market Advisors show.

“We have not witnessed any material tightening in the asset class as a result of the potential recalibration of muni ratings,” said Peter DeGroot, head of the municipal strategies group at New York-based Lehman.

Particularly funny is:

California Treasurer Bill Lockyer said in March that getting a Aaa rating may save taxpayers more than $5 billion over the life of the $61 billion in additional borrowing approved by voters. He also said the state paid $102 million from 2003 to 2007 to buy bond insurance, which would have been “unnecessary” if the state had a top rating.
…
California won a Aaa rating for its taxable debt in 2007, four grades higher than where Moody’s rates the most populous U.S. state on its municipal scale. Under the new system, the state may be rated instead at Aa2, based on the average, two grades below the top, said Tom Dresslar, Lockyer’s spokesman.

“They are not giving credit where credit is due,” Dresslar said. “The only promise we make to investors is that we will pay you your money on time and in full. California has never failed to do that.”

Many companies that have never yet defaulted on their debt have less than AAA ratings, Mr. Dressler!

And finally, a comment that is at least half-way sensible:

“The mapping of municipal credits to the global scale by Moody’s should have been done many years ago as the U.S. economy was growing strongly,” Mike Pietronico, chief executive officer of Miller Tabak Asset Management in New York, said in an e-mail. “We believe investors will balk at accepting lower yields with inflated ratings, and Moody’s has further damaged their franchise by bowing to political pressure.”

It’s too early to pronounce judgement regarding the effect of the Global Scale on municipal financing costs. The Global Scale isn’t even implemented yet and we are still experiencing interesting times. I suspect that it will not be possible to draw conclusions for at least ten years – long after the heroic politicians have been re-elected and the issue faded again into obscurity.

And I will also point out … I may be wrong on this! Maybe investors, as a class, are so utterly dumb that the cosmetic difference between the scales has had an effect that will unequivocably be shown to have increased the issuers’ expenses substantially.

But maybe it won’t. My concern about the issue is that there is very little public evidence that anybody has thought it through.

This entry was posted on Thursday, September 11th, 2008 at 1:56 pm and is filed under Miscellaneous News, Regulation. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.