U.S. Cities Look To Shed Ratings While Taking On More Debt (#GotBitcoin?)
U.S. cities and counties are using fewer ratings to assess the risks of the bonds they sell, providing investors with just one opinion on an increasing amount of new debt. U.S. Cities Look To Shed Ratings While Taking On More Debt
One-fourth of municipal borrowing is given a single grade, leaving smaller investors with less information.
Roughly 25% of the dollar value of all municipal debt issued this year carried a single grade from one of the major ratings firms, according to Municipal Market Analytics data as of Oct. 3. If that percentage holds through the end of the year, it would be the highest since the research firm began tracking the data in 2006. For the riskiest debt, the single-grade ratio by dollar volume was 37%.
Municipal officials and advisers said fewer ratings help cities trim expenses and save time when they borrow money for everything from school construction to sewer repairs. Bond issuers typically pay rating firms to issue a report. But some analysts said opting for one grade from a single firm puts smaller investors at a disadvantage as less information circulates through the $3.8 trillion municipal market.
“Mom-and-pop investors and small asset managers without their own research staff are at a disadvantage,” said Matt Fabian, a partner with Municipal Market Analytics.
Scores attached to municipal debt are important in the public finance world because investors rely on these opinions to help make decisions about buying or selling bonds that governments use largely to pay for new construction projects. The grades range from gold-plated triple-A to several levels of “junk.”
The largest graders are S&P Global Inc., Moody’s Corp. and Fitch Ratings, which together are responsible for 96% of all global bond ratings among firms registered with U.S. regulators. Some municipalities are required by statute to get grades of a certain quality from at least one ratings firm before borrowing.
The cities and counties that did rely on one rating this year gravitated to a particular grader more than others: S&P Global. Nearly 65% of the deals with one rating were evaluated by S&P, compared with 34% for Moody’s and 1% for Fitch, according to the Municipal Market Analytics data.
One of these borrowers that turned to S&P was Hoboken, N.J., which issued bonds in February to make park and road improvements. Hoboken finance director Linda Landolfi decided after conferring with the city’s financial adviser that Hoboken needed only an S&P rating for roughly $70 million in debt.
The reason: She was pleased with S&P’s double-A-plus grade and saw little need to get a second opinion.
“We don’t see that we’ll get a better rating from anybody else,” Ms. Landolfi said, adding that another ratings firm wouldn’t have “given us a worse rating,” either.
It is common for the major ratings firms to disagree about the fiscal health of cities they are asked to grade. One particular point of difference: pension liabilities.
Cities and counties across the U.S. don’t have enough assets on hand to pay for all future obligations to their workers, but how deep this deficit looks depends on what those cities expect to earn on their investments. Moody’s and Fitch impose their own calculations of pension liabilities while S&P relies more on government-provided projections.
The most noticeable divergence between the firms in 2018 occurred on the riskiest borrowings. Debt that Moody’s considers junk got an S&P rating at least one notch higher than the Moody’s grade 83% of the time, according to Municipal Market Analytics data of deals where both firms offered grades. There was more agreement between those two firms on safer issuances, according to the data.
A spokesman for S&P said the firm looks at many factors when evaluating how pension problems affect the riskiness of government debt. Cities can be penalized for making insufficient annual pension contributions, using unrealistic mortality rates or using investment-return projections S&P considers overly optimistic, the spokesman said.
“We don’t simply take these numbers at face value,” the firm said in a statement.
One place affected by these varying grading approaches is Calhoun County, in southern Michigan.
Moody’s in March said its calculation of the county’s pension liabilities was $86 million, more than twice the figure released by the government. But when the county asked S&P to grade a new offering of $8 million last month, S&P relied on the government’s numbers to estimate how much the county has on hand to cover pension promises.
S&P awarded the bonds a double-A grade, one notch higher than the grade Moody’s provided in its unsolicited review earlier in the year.
One financial adviser to the county said S&P was hired partly because that firm’s ratings were historically more positive for municipalities across the state. The proceeds will be used to shore up the county’s pension plan.
“S&P is more favorable to Michigan credits than Moody’s has been in the past,” said Bobby Bendzinski, president of Bendzinski & Co., the county’s financial adviser.
A spokesman for S&P said that “the U.S. municipal bond market benefits from a diversity of opinions on credit risks.”
Calhoun County Controller Kelli Scott said going with only S&P allowed the county to save costs associated with paying another rater. S&P, she said, could also rely on its past conversations with the county.
“We don’t have to start from scratch and tell the story every single time,” she said.
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