Buy Side

Fitch Recalibrates 38,000-Plus Ratings

Fitch Ratings lifted its rating on more than 38,000 municipal bond issues yesterday under a systematic overhaul of the way it assigns grades to the credit quality of state and local governments.

The New York-based rating agency hoisted ratings on debt secured by 40 states, the District of Columbia, the Virgin Islands, and Puerto Rico.

Some of the states not included in the recalibration were already rated AAA, while others do not have general obligation debt rated by Fitch.

Fitch is careful not to call these upgrades. They are “recalibrations” as part of an acknowledgement that municipalities were being held to a different standard from corporate and sovereign debt.

Municipalities have exhibited stronger repayment histories than corporate borrowers in the same credit rating bracket.

The fixed-income team at Janney Montgomery Scott in a report likened the municipal ratings scale to the scale at the health club — a few pounds lighter than other scales.

The recalibration is “a measure to maintain an alignment with other sectors,” said Richard Raphael, executive managing director at Fitch.

Moody’s Investors Service plans to implement a similarly wholesale recalibration of the municipal universe later this month.

About 3,750 Cusips not previously rated AAA by Fitch now enjoy the top rating.

More than 7,500 Cusips not previously rated AA-plus are now.

Matt Fabian, managing director at Municipal Market Advisors, in a report yesterday called the rating recalibrations at Fitch and Moody’s probably the biggest event in municipal bonds in 2010.

This will likely alleviate some of the scarcity that had dragged down yields on short-term municipals, Fabian said, as many more bonds will be considered safe by investors looking for shorter-term safe havens.

Conversely, the recalibration is likely to induce some scarcity of longer-term bonds, Fabian said. The higher ratings will probably enable some municipalities to save more money by issuing Build America Bonds, which are taxable and siphon supply out of the tax-exempt market. Since its inception in 2009, more highly rated issuers have accessed the BABs market.

Investors at first may avoid buying municipal bonds lofted into higher categories under the recalibration, Fabian said. This will not last too long, he said. Eventually the yields will trend to the ratings.

“Over time, once they’re on the same playing field, I think it will give munis a boost,” said Kathleen McNamara, municipal strategist at UBS Wealth Management.

Municipal credit was “underrated” under the old system, she said. Many investors comparing municipals with corporate or sovereign bonds on the same scale will realize municipals are safer than people thought previously, she said.


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