Sell Side

S&P Changes to Periodic from Quarterly Trend Reports

At a time when the agency is under fire from the issuer community and raising ratings on muni credits at a healthy clip, Standard & Poor's has decided to stop publishing quarterly trend reports used to give a picture of the overall health of municipal credits.

Standard & Poor's said yesterday it made an "internal" decision to stop publishing the quarterly report listing the aggregate upgrades and downgrades because not enough change occurs quarter to quarter.

"It was a decision reached earlier this year not to do a quarterly roundup," said Standard & Poor's spokeswoman Mimi Barker. "The roundups were stopped to better align our data."

Both Fitch Ratings and Moody's Investors Service said they would be releasing their own reports in the coming days. And market sources said the lack of data from Standard & Poor's would be missed.

"This is something the market relies on to follow overall credit quality," said Matt Fabian, managing director at Municipal Market Advisors.

Despite the Standard & Poor's announcement, analysis by The Bond Buyer of information obtained through Standard & Poor's Ratings Direct shows that the agency took 217 ratings actions in the quarter, upgrading municipal credits at a rate of 8.4-to-1 compared to downgrades.

Of that total, 183 raised ratings were recorded, compared to 35 lowered ratings. The data was gleaned from the ratings actions published in The Bond Buyer's weekly Rating Changes table, and includes multiple types of bonds under the same issuer counted separately.

This compares to an upgrade to downgrade ratio of 2.2-to-1 for the fourth quarter of 2007, the rating agency said in a quarterly report earlier this year.

Standard & Poor's says it conducts continual reviews of muni credits to ensure that the rating scales match their default characteristics. The rating agency said in a March 7 report: "U.S. Public Finance Rating Characteristics," that the percentage of muni credits rated AAA increased to 33% in 2007 from 20% in 1986. The agency expects the trend to continue."

"We anticipate further migration up the rating scale in the [U.S. Public Finance] sector, assuming that creditworthiness, particularly of government credits, remains strong," Standard & Poor's said in the report.

While the ratings improvement comes after many years of improving financial performance for issuers, state and local governments are beginning to face softening economic conditions. A slowing economy is putting pressure on state sales tax and personal income tax revenues and falling house values are hurting property taxes. At the same time, many face spiraling costs associated with pension and retiree health care liabilities.

"We've been getting higher ratings en masse from the rating agencies for several years now," said Richard Ciccarone, managing director at McDonnell Investment Management LLC. "But the past is not a good indication of what we are getting into."

The Standard & Poor's data compares to that compiled by Fitch, which shows that just 17 out of 30 Fitch's first-quarter ratings actions were an improvement in ratings. The data shows just 57% of the actions were raised ratings.

One reason for the upgrades could be a skewing of the data because of double counting. Since The Bond Buyer data compiles each individual action separately, an upgrade to one issuer could mean three or four ratings actions, all positive, that count in the data.

"If one state is upgraded there could be a lot of upgrades all at once," Barker said. "If the state gets upgraded a lot of the other things they issue, like school district bonds, get upgraded also."

Standard & Poor's released its latest default study last month, an annual analysis begun in 2001.

Other market sources said Standard & Poor's could be looking to move municipal credit ratings up its single scale.

The rating agency has come under fire recently for insisting that it uses a single rating scale across all sectors. Issuers like California's Treasurer Bill Lockyer have challenged that notion, calling on Standard & Poor's to address calls to rate municipals on the same scale as corporates.

"They have been under a lot of heat to try to get corporate and municipal ratings on the same playing field," said John Mousseau, portfolio manager at Cumberland Advisors Inc. "If you think they are trying to orient themselves in the footprint of corporate ratings, [the high percentage of raised ratings] does make sense."



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