Moody’s Investors Services is introducing a new rating methodology for special tax revenue bonds that may affect ratings for 27 bond issues.
The rating methodology applies to 560 rated municipal securities.
As a result of the new methods, Moody’s has placed 23 bond ratings on review for possible downgrade and four on review for possible upgrades. The 27 bonds together are $2.7 billion in par value. Moody’s said it may change some of the ratings by more than one notch.
“The new methodology largely reflects existing practice and introduces a new scorecard that standardizes the analysis and relative weighting of quantitative and qualitative factors currently considered in our ratings analysis,” Moody’s said.
Up to now Moody’s has used several methodologies to analyze the sector — there was not a single one, according to analyst John Medina. “All these credits were deemed to have similar profiles and therefore capable of being rated under one methodology,” he said.
“The goal of everything we do is to be clear, concise and transparent to those we serve, which is the investor community,” Medina said.
The rating methodology is for non-property tax-secured bonds issued by local and state governments. Some of the special taxes covered include sales and excise taxes, tourist-related taxes and fees, income taxes, utility service taxes, gas taxes, stadium-related taxes, real property transfer taxes, court fees and other levies.
The review of the 27 bonds will “focus on the issuer’s taxable base and revenue pledge, legal security package for the bonds, and financial metrics to determine the appropriate rating. We will also focus on qualitative factors such as fiscal and debt-management policies, as well as expectations of future tax revenue performance and debt service requirements,” Moody’s said.
In the new methodology released Tuesday, “U.S. Public Finance Special Tax Methodology,” the special tax rating will normally not rise above the level of the corresponding general obligation rating unless certain conditions are met.
Three key rating factors are used to generate a “scorecard-indicated rating.” However, the actual public rating may deviate by up to two notches due to the influence of Moody’s rating committee.
The new methodology’s “primary purpose is to provide transparency to the market with a common starting point of analysis, while ensuring consistent rating outcomes across a diverse spectrum of issuer types, revenue pledges, leverage and cash-flow quality, and legal security features,” Moody’s said.
The three key rating factors are: taxable base and pledge (30%), legal structure (30%), and financial metrics (40%). The first factor’s sub-factors are economic strength and the nature of the special tax pledge. The second factor’s sub-factors are the additional bonds test and debt-service reserve fund requirement. The third factor’s sub-factors are maximum annual debt-service coverage ratio, revenue trend, and revenue volatility.
The report lists the 27 ratings under review for possible change.
