Carl Dincesen, the former head of municipal credit at Ambac, plans to launch an investor-pays credit ratings service later this month to fill what he describes as a niche: a forward-looking evaluation of the probability a municipality will default.
The service, Benchmark Bond Ratings, is based in Garden City, N.Y., and will open for business on Feb. 15.
The firm will issue research reports on municipal borrowers at the request of the investor, for a fee. The report will assign a number grade to the issuer signifying the likelihood it will default over the next 10 years.
Dincesen said the ratings can serve as a counterweight to those provided by Moody’s Investors Service, Standard & Poor’s, and Fitch Ratings, which he believes are vague and lag the true conditions of municipalities. He called their ratings “necessary but not always sufficient.”
“We all know it’s not the greatest, but there didn’t seem to be any alternative,” said Dincesen, who was director of public finance credit management at Ambac and oversaw workout strategies for problem credits. “There should be a spot in there for people who want professional opinions in a standardized format that they would have access to, that they buy.”
Benchmark’s ratings would differ from Standard & Poor’s, Moody’s, and Fitch in several ways. First, those agencies collect fees from the borrower, which pays for the rating in order to be palatable to investors in public capital markets. Benchmark, by contrast, would charge fees to investors looking for insight into default probabilities.
Second, the credit agencies’ ratings do not purport to predict default rates with any precision. Standard & Poor’s defines a triple-A rating as “extremely strong” capacity to meet financial commitments. A single-A is “somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions,” but “still strong.”
An investor might be forgiven for wondering what this actually means in terms of the potential for interrupted payment streams.
Benchmark plans to assign a rating of 1 through 6 to each issuer, with each number denoting a predictive default rate. A 1, for instance, indicates a default rate below 0.1%, a 2 suggests a default rate below 0.5%, and a 3 implies a default rate of at most 1%.
Dincesen wrote a sample credit opinion on the Dormitory Authority of the State of New York’s $102.4 million pledged assessments revenue bond deal in December. He rated it 4, indicating a default probability of as much as 2.5%. He attached a rating of 3 to Riverside, Calif.’s $140 million electric revenue bond deal in December.
At the high end of the rating system, a 5 implies a default rate of up to 10% and a 6 indicates a possible 25% risk.
Dincesen said thinking of municipals in terms of default likelihood rather than financial capacity is bred from his time at Ambac, where his team managed a book of policies on $200 billion of munis.
The insurer thought of the book as having to be the ultimate buyer of the bonds without being able to sell them. In that context, it helps to have a more accurate perception of how extensive defaults are going to be.