WASHINGTON — Bowing to growing concerns from muni issuers, Moody’s Investors Service announced Wednesday that it will stop trying to get state and local issuers to agree to indemnify and hold it and its officers harmless for any mistakes they might make as a precondition to assigning ratings to municipal bond transactions.

Click here to see Moody's provision.

Click here to see S&P's Letter

Market participants applauded the action, but several said they hope Standard & Poor’s will withdraw indemnification language in its rating agreements, even though its language is different than that used by Moody’s.

Moody’s had been including far-reaching indemnification language in ratings applications, and had recently urged issuers to fill out and sign them before the agency would provide them with ratings.

Market participants had complained that it could potentially cost an issuer several times the cost of the rating even if it had done nothing wrong in the information that it supplied the rating agency — and even if the agency had made a mistake in judgment that was not based on any information it obtained from the issuer.

Several issuers and their lawyers had questioned whether state and local governments could legally enter into these kinds of indemnification agreements. They complained Moody’s was overreaching by trying to hold issuers liable for legal costs or liabilities stemming from ratings of their bonds, except in situations involving “fraud or willful misconduct” on the part of Moody’s.

As a result, a Moody’s spokesman issued this statement: “As Moody’s began introducing rating applications to the municipal market earlier this year, we heard from issuers in isolated instances that our standard indemnification language raised concerns unique to their market. While we’ve worked directly with issuers to address their concerns, we’ve recently heard similar concerns from the broader municipal market. Therefore, although this type of language is common other business services agreements, we have decided to suspend use of this indemnification language in this sector.”

“I think they made the right decision,” said Robert Doty, president of American Governmental Financial Services Company, a Sacramento-based financial advisory firm.

“We’re delighted,” said Charles Thompson, executive director of the International Municipal Lawyers Association. “I think Moody’s made the right decision in that most state and local governments are prohibited from entering into indemnification agreements and it clarifies the transactions so that there is less ambiguity.”

Thompson said that IMLA “is also hoping that Standard & Poor’s will withdraw its request for indemnification” from issuers.

A spokesman for Standard & Poor’s declined to comment on Thompson’s statement. He would only say: “S&P occasionally updates the terms of its engagement agreements with issuers, and S&P has entered into revised agreements with many issuers over the last several months. These agreements permit S&P and the party contracting with S&P to set out clearly their respective rights and obligations in regard to the ratings engagement.”

According to sources and Standard & Poor’s rating application language obtained by The Bond Buyer, the rating agency is seeking to indemnify itself against losses stemming from the issuer providing false or misleading information.

But several municipal issuers said the Standard & Poor’s language still goes too far and that they cannot sign it.

Meanwhile, a spokesman for Fitch Ratings said that firm does not include any indemnification language in its rating applications with issuers.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.