WASHINGTON — The National Association of Bond Lawyers is urging federal regulators to put a notice on EMMA alerting investors that rating information in offering and continuing disclosure documents may not be accurate as credit rating agencies recalibrate the ratings for tens of thousands of municipal bonds.
The notice would warn investors using the Electronic Municipal Market Access site that, prior to making a decision to buy or sell a muni bond, they should check with Fitch Ratings and Moody's Investors Service, which have either taken action or announced plans to recalibrate their municipal ratings based on a "global" or uniform rating scale that applies to corporate debt.
"During this period of recalibration there may be some market confusion as to the applicable rating on any given municipal security," NABL president Kathleen McKinney wrote in a letter sent to Martha Mahan Haines, the SEC's municipal securities chief, and MSRB executive director Lynnette Hotchkiss.
McKinney, a partner at Haynsworth Sinkler Boyd PA in Greenville, S.C., noted that at least one rating agency said it would not directly notify issuers of their recalibrated ratings. Issuers have complained in the past that they cannot disclose rating changes if they are unaware of them.
The credit rating agencies' decisions to recalibrate municipal bond ratings comes after federal lawmakers and issuers pushed them to use a global scale for the ratings, arguing that munis generally are rated lower and on a more rigorous scale than comparable corporate debt, even though they have a much lower rate of default.
Fitch Ratings recalibrated and lifted its ratings on more than 38,000 municipal bond issues Monday, though it plans another round of recalibrations on April 30. Moody's Investors Service has announced a tentative schedule that calls for changes to all states and some localities beginning on April 19. It plans to recalibrate additional muni sectors over the following three weeks.
Standard & Poor's has long maintained that it already uses a uniform scale across all major credit sectors, though it has upgraded hundreds more municipal credits than it has downgraded in recent years as a result of an updated default study.
Asked yesterday about the letter, MSRB and SEC officials said they are still reviewing it and could not yet comment.
NABL's action comes as market participants were raising questions about whether municipal issuers had to file material event notices to inform the market that their ratings have been changed. A check with EMMA showed that from Monday through Wednesday afternoon issuers had filed 104 material event notices about rating changes, only a small portion of which were tied to the Fitch recalibrations.
Securities law experts said the question about whether to file such notices depends on whether an issuer and its advisers believe such rating changes are material.
While some market participants believe rating changes should always be disclosed, the agencies have stressed that their recalibrations do not represent upgrades or changes in their rating opinions.
In a release it issued on March 25, Fitch said: "The recalibration of certain public finance ratings should not be interpreted as an improvement in the credit quality of those securities. Rather they are adjustments to denote a comparable level of credit risk as ratings in other sectors."
When Moody's last month announced the timing of its recalibrations, it stressed they will "not represent a change in our opinion of the credit quality of the affected issuers."
The securities law experts said they do not expect the SEC to provide any guidance on this issue because the commission typically refrains from giving any indication about whether information would be material.
When the ratings of municipal bonds were downgraded to reflect the lowered ratings of the companies that had insured the bonds in early 2008, the SEC distributed two pieces of guidance to NABL meant to clarify issuers' roles. The first, which the SEC informally sent to the bond attorney group on Jan. 18 of that year, said issuers did not need to file material event notices notifying investors of the initial Fitch downgrade of Ambac Assurance Corp. because "press coverage has been so widespread and extensive."
But in a Feb. 6 clarification, that many attorneys saw as a reversal, the SEC stated the earlier notice only applied to the reporting of the rating downgrades to the insurers and not to the wrapped securities that were downgraded as a result. The SEC said it expected issuers to determine whether material event notices had to be filed.
Asked about the disclosure of rating changes due to the recalibrations, Haines said yesterday: "Gee, I would think that issuers would be happy to report apparent rating upgrades. We don't typically comment on materiality."
Under the SEC's Rule 15c2-12 on disclosure, most municipal issuers must file material event notices disclosing rating changes that are "material" if they want dealers to continue to underwrite their bonds. The rule prohibits dealers from underwriting most municipal securities of $1 million or more unless the issuer has entered into a written continuing disclosure agreement with the bondholders to disclose annual financial and operating information as well as material events when they occur.
Guidance issued by the SEC lists at least 11 events that could be material, including rating changes. But the guidance leaves it up to the issuer and other market participants to determine whether any of the 11 events are material. Information generally is deemed to be material, under case law if an investor would want to know about it prior to making an investment decisions.
MSRB is working with the rating agencies to get direct feeds of rating changes filed to EMMA but the project is still in the developing phases.
"Getting real-time municipal bond ratings on EMMA is a top priority for the MSRB," said board chairman Peter Clarke, JPMorgan's managing director and vice chairman of tax-exempt capital markets. "We are in discussions with ratings agencies regarding implementation of this significant undertaking. With this enhancement, EMMA would become an even more valuable tool for investors and the marketplace alike."