Once Rare 'Super Downgrades' Become More Common

Super downgrades remain rare events, but they reflect a more aggressive posture by the rating agencies, market observers say.

According to Municipal Market Advisors, the three major rating agencies issued 196 super downgrades between June 2010 and August 2011.

One of the more prominent super downgrades this year was in April when DeKalb County — Georgia’s third-largest county — was slashed five notches to BBB from AA-minus, by Standard & Poor’s. S&P simultaneously withdrew its rating, citing poor disclosure by the issuer.

The rating had been affirmed at AAA just five months earlier.

In August, a speculative-grade West Texas jail in Jones County got hit with a 13-notch bombshell from Standard & Poor’s that knocked the rating to CC from A-minus. Jones County officials had indicated plans to default on the debt; following through on that promise earlier this month, the credit got stamped with a D.

Municipal Market Data analyst Dan Berger wrote in August that the chief difference between those two credits is that DeKalb County “was widely followed but offering poor disclosure, whereas Jones County, Texas, offers excellent disclosure but it is not widely followed.”

Moody’s said in an Aug. 31 special comment that it had delivered super downgrades to 102 credits, or 0.6% of its rated muni database, in the previous 18 months.

Such downgrades “remain relatively rare,” are “heavily concentrated” in sensitive sectors, and tend to be driven by “a confluence of factors,” it said.

Standard & Poor’s, in a 70-page document on rating changes in 2010, only looks at rating categories rather than intra-category nuances. The most pertinent data point is that 0.16% of AAA-rated credits were dropped to the single-A category, and 3.35% of top-rated credits had their ratings withdrawn.

Fitch Ratings couldn’t comment on the trend by press time.

Alan Schankel, head of fixed income at Philadelphia-based Janney Capital Markets, noted that just in the past five weeks his coverage area has seen super-downgrades for Collingswood, NJ, and Lackawanna County, Pa.

“It reflects the rating agencies being more aggressive, particularly when they don’t get the financial information as quickly as they like,” Schankel said. “The rating agencies are under the gun a little bit and it’s good — it’s a positive development. They are acting more quickly than might have in the past.”

Critics, however, have said super downgrades are the result of the agencies sleeping at the wheel while the economy undergoes a secular shift, causing them to issue harsh updates upon waking.

“The rating agencies, just by their structure, are reactionary,” said Michael Pietronico, chief executive at New York-based Miller Tabak Asset Management. “In most cases they wait for information provided by the issuer, and when you wait for that information to be sent, it’s already priced into the market, and for folks like ourselves who do their own credit research, its 100% discounted by the time the rating agencies make their move.”

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