SAN FRANCISCO -Standard & Poor's stood up for its municipal bond rating system in an article it released on Friday.
The credit agencies have come under fire for their rating policies, most recently from a letter last week signed by more than a dozen officials from major municipal bond issuers, saying "differential ratings standards" between tax-exempt debt and corporate debt have punished municipal issuers with unfairly low ratings.
The Standard & Poor's article argues that, though rated municipal bonds have lower default rates than similarly rated corporates, that comparison provides an incomplete picture.
"Just as there's credit risk in corporate securities, there is credit risk in municipal securities. We saw that this week," Bill Montrone, managing director and head of Standard & Poor's U.S. public finance group, said Friday, referring to Jefferson County, Ala., sewer bonds, which Standard & Poor's dropped to CCC last week as its derivative program unraveled.
The article also argues that the current rating system for municipal bonds serves a valuable purpose for investors, borne out by the markets, which have historically preserved a meaningful spread between triple-A and double-A municipal credits.
"Although the risks that Beverly Hills, Calif. (AAA/Stable) will default or that Providence, R.I. (A/Stable) will default are both relatively low, they are, in our view, not the same," the article says. "That is because the credit profiles and economic fundamentals of the two municipalities differ."
Montrone said Standard & Poor's does not plan to introduce a distinct "global scale," as Moody's Investors Service has done for some taxable municipal credits.
"We've got what we believe is one global scale now that is consistently understood," he said.
Montrone said the agency's ratings are reviewed regularly, and address the quality of each individual credit. "That distinction would be lost if you went through a mapping exercise," he said.
The role of ratings agencies in the muni market is scheduled to be on the table Wednesday at a House Financial Services Committee hearing.
