For a long time investors have known that a BBB muni has an historic default rate like that of a AAA-rated corporate bonds. But the agency has used a separate scale–not that it really matters what the alphabet-soup-rating alchemists say, anyway. (These are the same folks that deemed certain tranches of sub-prime mortgage debt to be AAA). Moody’s has finally announced it’s going to start using one credit-rating scale. Here’s the news story from Bloomberg. Underlining is mine.
Moody’s Muni Bond Ratings Will Move to Global Scale (Update1)
2010-03-16 16:52:35.298 GMT
(Adds detail on ratings starting in fifth paragraph.)
By Darrell Preston
March 16 (Bloomberg) — Municipal debt rankings by Moody’s Investors Service will shift to a global rating system next month that will put the 70,000 state and local bonds it assesses on a scale that’s comparable with corporate securities.
“We are responding to the evolving needs of the market for greater comparability between the ratings of these obligations and those issued by other entities,” Gail Sussman, group managing director at New York-based Moody’s, said in a press release today. The new ratings don’t “represent a change in our opinion of the credit quality of affected issuers.”
Municipal bond issuers led by California Treasurer Bill Lockyer began pressing companies that rate their debt two years ago to show investors how they would be assessed on a corporate scale. They said the existing system for ranking state and local obligations led to higher borrowing costs because government issuers default less frequently than higher-rated corporations.
U.S. Representative Barney Frank, a Massachusetts Democrat who chairs the House Financial Services Committee, called the different rating scales “ridiculous” at a hearing on the $2.8 trillion market in May 2008.
Moody’s report on its rating methodology said the move to a global scale will raise long-term state and local government ratings by as much as three levels. The new rankings shouldn’t be viewed as upgrades, the company said.
Most housing, health care and “enterprise” sectors of municipal bonds won’t change “because they are already well- calibrated with the global scale,” the report said.
Moody’s in the past rated state and local bonds based on a separate scale that weighed credit risk within the municipal bond sector. The new municipal system will focus on credit risk based on average levels of default and loss in comparison to other similar debt securities, Moody’s said.
The company said it would phase in the move to the new ratings over four weeks.
For Related News and Information:
Top muni-bond news: MUNT <GO>
Most read muni-bond stories: TNI MUN READ <GO> For financial information on municipal issuers: SMUN <GO> For Moody’s ratings: MDY <GO>
–Editors: Mark Tannenbaum, William Glasgall
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