Several issuers, analysts and broker-dealers last week praised Moody's Investors Service plan to offer global-equivalent ratings for municipal credits on a voluntary basis beginning next month, arguing that the change will more accurately reflect muni bond default histories.
The comments were made in letters to Moody's. Some of the letters urged the rating agency to eventually replace the dual municipal and global rating scales into a single scale that would rate most municipals double- or triple-A. Other letters, including one from the Government Finance Officers Association, advocated the addition of a global rating to the existing muni rating.
Though the issue of a single global rating scale has found traction in recent months, no rating agency has yet embraced the idea. Standard & Poor's has said they already have a global scale which is used across all sectors, but some market participants dispute that assertion, while Fitch Ratings has named a top analyst to consider the possibility of "harmonizing" the corporate and public finance rating scales.
Many of the letters to Moody's argued that either the addition of a global rating or a harmonized scale would make certain A-rated municipal bonds eligible for money market funds under the Securities and Exchange Commission's Rule 2a-7. To comply with the rule, money market funds generally are limited to securities that have ratings of double-A or higher.
"The largest and most costly recent disruption in the municipal bond market has been the short end of the market, including variable rate bonds marketed to tax-exempt money market funds," wrote California Treasurer Bill Lockyer, who is leading the push to achieve a single global rating for municipal issuers. Issuers with ratings that do not meet 2a-7 standards have been "forced" to purchase credit enhancement in order to sell variable rate bonds, he said, adding that after the rating agencies downgraded many bond insurers the variable rate bonds they insured fell below the 2a-7 threshold.
"Many of those bonds, if rated on a global scale, would have been rated Aa or Aaa without insurance because they possessed sufficient credit quality," Lockyer wrote. "Therefore, those bonds would have remained money market-eligible (and, in fact, the issuers may not have needed to purchase bond insurance in the first place.)"
Some letters, including Lockyer's and the GFOA's, also recommend that a global rating be offered free to issuers that already have underlying ratings.
"Because the Global Scale Rating methodology is a direct by-product of the Moody's Municipal Scale, we do not believe issuer or investor users should pay for an additional credit analysis," wrote Charles Cox, GFOA's president and the finance director of Farmer's Branch,Tex.
It is unclear to what degree the comments reflect the range of opinions in the municipal market. The letters obtained by The Bond Buyer all favor Moody's plan and are posted on a Web site run by Lockyer. They come from a variety of market participants, from large broker-dealers such as UBS Securities LLC and Morgan Stanley & Co., to financial advisers such as Rice Financial Products Co. and Lamont Financial Services Corp.
A Moody's spokesman last week declined to release the full trove of comments the rating agency has received but said it is working to summarize all of them into one release sometime later this month. And a spokeswoman for the Securities Industry and Financial Markets Association, which represents the largest group of broker-dealers, said that it is still working on its comment letter.
Moody's proposal comes amid heavy interest in the issue by federal lawmakers, some of whom have both taken aim at the existing rating system and criticized the Moody's plan. At a hearing on municipal bonds last month, House Financial Services Chairman Barney Frank, D-Mass., suggested Moody's plan was only a ploy for the rating agency to make more money.
"You're going to offer them a second item for which you can charge them more. You're going to continue to abuse them," Frank told Laura Levenstein, senior managing director of Moody's global public, project and infrastructure finance group, who was testifying before his panel.
Though Frank could not be reached for additional comment last week, his staff has said recently that they are closely following the situation and are speaking regularly with credit rating agencies.
Some of the letters sent to Moody's appear to adopt a middle ground between the existing rating structure and a single global scale. Roger Anderson, executive director of the New Jersey Educational Facilities Authority, and Edward De La Rosa of the investment bank De La Rosa & Co., argued that there should be gradations or "modifiers" within any new global scale to reflect investors requests to maintain some amount of differentiation among municipal credits.
"I recognize that the current municipal rating scale provides investors with finer distinctions of credit quality than is true with the global scale," Anderson wrote. "I suggest the same distinctions could be communicated by having more gradations within each rating category; for example, by having subcategories within the Aa or A ratings that range from 1 to 7, instead of just the current 1 to 3."
De La Rosa recommended only three or four gradations.
