Rating Agencies

A Good 2nd Opinion

WASHINGTON — Maine is the first state or local government to obtain a credit opinion from the National Association of Insurance Commissioner’s Securities Valuation Office for a new issue of municipal bonds.

Ratings Distribution: 2006-2010

The state received the Securities Valuation Office’s highest quality designation — a NAIC-1 — for $58.2 million of general obligation bonds, including Build America Bonds, that it plans to sell Monday in a negotiated sale led by Wells Fargo Securities. The debt will replace short-term notes issued during the fiscal year to finance roads, bridges and other infrastructure projects.

“I asked the NAIC to review original-issue Maine bonds this year because I believe its evaluation process best reveals the security and dependability of Maine’s constitutionally guaranteed debt-payment promise,” said state Treasurer David Lemoine. “I am hopeful that other state treasurers and municipal bond issuers will begin seeking original-issue opinions from this nonprofit ratings service and that fixed-income investors beyond the insurance industry will come to recognize its value as a tool for judging default risks.”

Maine also expects this week to receive ratings from Moody’s Investors Service, which had rated the state’s GO debt Aa2, and Standard & Poor’s, which in March revised its outlook to negative from stable on the state’s AA GO rating. The outlook change reflects the state’s weakened financial position and diminished liquidity, the agency said.

The NAIC-1 designation is equivalent to an A-minus or better rating, said Chris Evangel, managing director of the Securities Valuation Office, which thus far has issued credit opinions for 1,000 municipal bonds held by insurance companies. The office has six levels of designations. NAIC-2 is equivalent to a triple-B rating, NAIC-3 to double-B, NAIC-4 to single-B, NAIC-5 to triple-C, which would mean the bonds are near or in default, and NAIC-6 to double-C, which would mean the bonds are in default, he said.

“We’ve been doing advance ratings for corporate debt for years. But this is the first one we’ve done on a pre-sale basis for a state or local government,” Evangel said. “We try to put these on a similar scale as corporates because what we’re ultimately concerned about is having the appropriate risk-based capital allocations for holdings so we don’t differentiate between municipals or corporates.”

In its May 17 opinion, the Securities Valuation Office said the NAIC-1 rating reflects the state’s full faith and credit pledge supporting the bonds; Maine’s constitutional requirement that the treasurer set aside the first general fund revenues available for the bonds if sufficient revenues are not legislatively appropriated; conservative debt practices; and an economy that has fared better than most during the current recession.

The office said potential risks include an extremely narrow liquidity position, which may require a return to cash-flow borrowing; a negative generally accepted accounting principle general fund position; and considerable budgetary pressures expected to continue into the next biennium. Long-term challenges include an aging population and shrinking labor force as well as significant unfunded pension and other post-employment benefit obligations.

The upcoming transaction will include tax-exempt and taxable bonds as well as BABs with maturities of up to 10 years. Wells Fargo is leading the sale. The financial adviser is Public Financial Management Inc., and bond counsel is Edwards Angell Palmer & Dodge LLP.

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