SEATTLE — Issuer officials put a representative of Moody’s Investors Service on the defensive here Monday afternoon as they questioned the credibility of the three major rating agencies, which they faulted for delaying the “recalibration” of their municipal rating scales into a single global scale.
Gail Sussman, group managing director at Moody’s, was forced to defend her agency’s decision last October to delay the recalibration of its muni scale because of the unsettled conditions in the global credit markets.
“We really believe after a significant amount of research that it is not wise to do this while the entire market is in upheaval,” she said, speaking on a panel at the Government Finance Officers Association’s annual meeting here on credit rating recalibration.
The panel was moderated by Timothy Firestine, chief administrative officer of Montgomery County, Md., and also included John Carter, finance director for Bellingham, Wash., and Laura Lockwood-McCall, director of debt management in the Oregon State Treasury.
“We’re looking at a market that we’ve never seen before, and the last thing that the investors need is to have us totally change what we’re going to be calibrating and assigning ratings,” Sussman said. “Credit spreads are crazy, issuers are worried about market access, [and] there are competitive deals for issuers that are failing.”
Sussman stressed that Moody’s is committed to a recalibration when market conditions settle, reiterating what another Moody’s official told members of the House Financial Services Committee last month. Lawmakers on that committee have introduced legislation that would mandate uniform credit ratings.
But Sussman’s defense of Moody’s did not sit well with some GFOA members who attended the panel discussion.
Multiple issuer officials asked Sussman bluntly what the credit agencies will do to restore the credibility to their ratings, noting that issuers may need to sell debt before the agencies follow through with their recalibration plans.
“What are you planning to do for us that are coming out with … issuance now?” one official asked. “Are you using an old scale? Are you using a modified scale? Are you testing a recalibration?”
Sussman said that Moody’s is planning to continue to use its muni scale “cleanly and purely.”
“The reason is that if we start to do anything to change the way that we’re looking at it without flagging what we’re doing and without being transparent about what thought process goes into it, it is very difficult for people to understand what our ratings mean,” she said.
Sussman also said Moody’s had boosted its efforts at transparency, by meeting with a cross-section of market participants and publishing as much research in the first six months of 2009 as it published in all of last year.
Another issuer official said she was having a difficult time understanding why the rating agencies did not switch scales prior to the credit crisis, which would have saved a number of issuers from the pain of exposure to downgraded bond insurers. She urged the agencies to speed up the switch, rather than continue to wait out the financial crisis.
“Why wait?” the official asked. “If you were ready to go [last October] with global ratings, why not go with global ratings and let the municipal market stabilize? It seems to me that by the rating agencies waiting, we became even more unstable because investors still don’t understand the difference between my double-A and the corporate double-A.”
Sussman said it was not practical to recalibrate the scales prior to last year because there was not “cohesive” support for such a change among market participants. She reiterated that many in the market have insisted that this is not the appropriate time to make such a sweeping change.
In any case, she said that some credits currently locked out of the market — such as lower rated hospitals — would not benefit from improved market access under a recalibrated scale because investors would still buy and sell their securities as lower-rated credits.
“One of the criticism we get from the investor side is, 'Why do you think that we’re going to behave differently when an A1 credit perhaps becomes Aa2? Do you think we’re going to price that differently?” Sussman said. “While at the same time people are talking about the need to be fair for the issuers, there are investors that are saying, 'We know what that credit is, put whatever rating you want on it.’ ”
Moody’s decision to halt its recalibration last October came a few months after it detailed plans to move to a global scale. Fitch Ratings, which had announced similar plans, delayed its recalibration on the same day as Moody’s. Standard & Poor’s has asserted it always maintained just one scale for municipal and corporate debt, but upgraded thousands of credits last year as a result of an updated default study.
