New Rating Rules Stir Up Debt Managers in San Antonio

SAN ANTONIO —  Government officials vented frustration Saturday over new rating agency requirements imposed on some debt issuers as a result of the backlash from the financial crisis.

Members of the Government Finance Officers Association’s debt committee meeting here traded stories of how they have handled new rating procedures from Standard & Poor’s and Moody’s Investors Service that stemmed from the Dodd-Frank Wall Street Reform and Consumer Protection Act. The rating agencies have asked some municipal bond issuers to sign agreements under which they would accept greater liability for the information they provide for credit evaluations.

GFOA debt committee members complained that the new requirements have been inconsistent. Some issuers have not seen any new requirements from Standard & Poor’s or Moody’s, while others have faced dilemmas over whether or not to sign the agreements.

As a result of the rating issues, GFOA plans to release an alert this summer detailing the issues governments need to be aware of regarding the rating agencies’ changing business practices. In January, GFOA intends to draft a best practices document for handling the credit ratings.

GFOA will be consulting with the National Association of Bond Lawyers and the International Municipal Lawyers Association to make sure an issuer’s bond counsel and in-house attorneys are aware of the rating issues.

Dodd-Frank, signed into law last summer, put the credit rating business under greater scrutiny. The agencies were blamed for questionable ratings assigned to housing-related securities leading up the financial crisis.

The law would make it easier for investors to sue rating agencies if they “knowingly or recklessly fail” to conduct a reasonable investigation of the rated security.

With that law in place, both Moody’s and Standard & Poor’s last year took steps to hold issuers more accountable for the information they give to the agencies.

Moody’s was requiring issuers to accept an indemnification agreement, saying that issuers would pay any legal costs that could come from a lawsuit over a credit rating. Moody’s dropped the indemnification requests after issuers and other muni market participants complained about the action.

Standard & Poor’s has included “terms and conditions” language with a credit rating stating that it could sue an issuer if it provided material misstatements or omissions associated with the rating.

The terms of this agreement have been “pretty inconsistent,” said Eric Johansen, treasurer of Portland, Ore., and chairman of the debt committee. GFOA is looking to get from rating agencies a “workable, consistent contract from issuer to issuer,” he said.

Some GFOA members said they crossed out sections of the Standard & Poor’s language before signing it. Others said they paid for and received a rating without signing the liability agreement.

Other officials said they are worried that by signing any liability agreement, they might be violating state law and agreeing to something beyond their authority.

Additionally, the cost of a rating may have gone up as a result of Dodd-Frank. Timothy Firestine, chief administrative officer for Montgomery County, Md., said he was “shocked” when the annual cost of ratings from one of the credit agencies jumped to $95,000 last year from $60,000.

The agencies are “taking into account additional work from Dodd-Frank,” he said Sunday in an interview.

GFOA members said they would also like to see greater transparency in the cost of a rating from issuer to issuer.

“The whole [fee] schedule seems to be a bit arbitrary,” Firestine said.

The Dodd-Frank Act has also changed the personal relationship between rating analysts and government officials, according to GFOA members. When meeting with government officials, the rating analysts are bringing a renewed aura of skepticism and formality, some members said. Gone are the relaxed relationships with rating analysts, they said.

The new environment has made it harder for issuers to have back-and-fourth, “what-if” conversations with credit analysts, issuer officials said. They also emphasized the need to prepare in advance of meetings with the analysts.

“Personal relationships with rating analysts have changed,” said Frank Hoadley, the capital finance director for Wisconsin. “They’re much more formal now.”

Some officials said there is greater turnover among the analysts they meet with. Some said they met with a new team of credit analysts just six months after a previous meeting. The issuer officials said they have to start over again explaining the nature of their credit to the new analysts.

The analysts’ level of detailed questioning has reached a new breadth, several GFOA members said. In one instance, analysts asked about the possible effects of a National Football League lockout this season on the economy in Indianapolis, said Dan Huge, chief financial officer of the Indiana Convention Center.

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