Changes to Pennsylvania school district enhanced ratings by bond rating agencies have generated confusion in the capital markets, according to a
Over the past year, S&P Global Ratings and Moody's Investors Service overhauled their treatment and resultant enhanced ratings of the state aid intercept program, which covers debt-service payments by distressed school districts in danger of default.
"We and some investors have been confused about how S&P and Bloomberg [database] are showing ratings related to Pennsylvania school districts since S&P discontinued its ratings," said PNC managing director and municipal strategist Tom Kozlik.
On April 26, S&P discontinued all intercept program enhanced ratings, both predefault and postdefault. It said it would rate no bonds on the enhancement security and does not expect to reinstate the program in the short to medium term.
"The actual underlying ratings for the Pennsylvania school districts have not been withdrawn or discontinued, despite the confusion created by the wording S&P used when calling the enhanced ratings 'the underlying rating for credit programs on Pennsylvania's school districts' and because of the way S&P and Bloomberg have been showing the S&P ratings in their databases since April 26," said Kozlik.
Both S&P and Moody's cited a lengthy budget impasse between Gov. Tom Wolf and lawmakers. Wolf allowed the fiscal 2016 budget, nine months late, to become law without his signature. The legislature is debating Wolf's budget billion plan for fiscal 2017.
Moody's made an exclusive exception for Pennsylvania related to its predefault enhancement criteria. Now Moody's assigns all predefault intercept enhanced ratings on a bottom-up basis from the underlying rating instead of a top-down approach beginning with the state's general obligation rating.
Its adjustment in December resulted in a five-notch downgrade to the Philadelphia School District.
Moody's also withdrew enhanced ratings for school districts without underlying ratings, also exclusive to the state's predefault mechanisms.
It now caps predefault and postdefault enhanced ratings at Baa1, with a floor of B1.
