LOS ANGELES— Fitch released revised criteria Monday on how it rates tax-supported state and local government credits.
The aim is to provide clearer explanations about how analysts reach ratings decisions.
The rating changes are expected to be minimal, because the overall focus is on "communicating our opinions more clearly to the market," said Laura Porter, a Fitch credit analyst.
Fitch has revised its U.S. tax-supported rating criteria to include four key rating factors and has established rating category expectations for each.
It released a draft of the proposed changes in September, simultaneously requesting feedback from market participants.
The four key rating factors Fitch analysts will consider are the revenue framework, expenditure framework, long-term liability burden and operating performance within the context of the credit's economic base. It formerly looked at debt, the economy, finance and management.
From here on out, Fitch's reports will include analysis on each of those sectors, where previously it would have just written an analysis of the credit in general, Porter said.
"The idea is that people will get more of a sense of the building blocks of the credit," she said.
Most Fitch-rated state and local government tax-supported issuers will also now have issuer default ratings, similar to the unlimited tax general obligation ratings the rating agency has historically provided.
"Fitch did not have an issuer default rating, but it was accepted that ULTGO was an assessment of general issuer credit quality; we just did not make it explicit," Porter said.
Fitch also has created what it calls the Fitch Analytical Sensitivity Tool V2.0, which incorporates revenue sensitivity analysis and scenario analysis based on how a credit's revenues would fair in a moderate economic downturn.
FAST generates a revenue scenario based on a common GDP stress test, grounded in historical data for each issuer. FAST provides insight into an issuer's revenue trends through the cycle and allows for peer analysis. It is not a forecasting tool.
"We developed tools that look at historical revenue for an issuer and how the issuers' revenues could be affected in an extended downturn." Porter said. "We have always maintained downturns impact some issuers differently. It's a way to convey that to the markets."
The ratings have always focused on the probability of default. Fitch wants the market to know the ratings will not just rise and fall with economic cycles.
"Through an economic cycle, we would expect to maintain the ratings that we have unless there is something in how the issuer is affected or the issuer responds that is not consistent with expectations," she said.
The new tool will also include expanded peer analysis.
The rating agency said the issuer experience should remain unchanged because it will be asking for the same information it reviewed under its prior system.
The most significant change in the criteria is that Fitch will be incorporating a bankruptcy recovery tool, meaning that it will include the recovery prospects for a local government's bonds in a bankruptcy, Porter said.
The change will only affect credits that Fitch expects would have superior recovery prospects in the event of a bankruptcy. It will not impact the vast majority of credits, she said.
With the four key rating factors as a base, Fitch said, the rating outcome reflects the rating agency's assessment of the degree of financial challenges an issuer is likely to confront, the tools it has to deal with those changes and the extent to which it expects those tools to be utilized.
There is no standard weighing of factors, but given that Fitch's rating definitions distinguish credits primarily based on relative vulnerability to adverse business or economic conditions, the assessment of operations is significant to the final rating, according to the report.
The ratings will continue to be based on the judgment of a team of experienced analysts rather than model-based outcomes.
"There is no standard weighting or nothing in the model that dictates the rating outcome," Porter said. "At the end of the day, it is still experienced analytical judgement that goes into the rating."
Fitch will host a
In addition to the updated criteria report, Fitch has released three related reports. One report summarizes industry feedback received during the comment period for the criteria exposure draft, and Fitch's response to that feedback.
The second report is a user guide that describes how Fitch will administer the criteria. This guide is in response to requests by market participants during the exposure draft period. Finally, Fitch has released a report describing FAST. Access to the tool and all criteria-related documents is available through its website on a complementary basis for three months.
