How an issuer prepares for potential market disruption may affect short-term ratings on bond anticipation notes, Moody's Investors Service said yesterday. The agency has changed its criteria for new Ban ratings to take into account the difficulty issuers could have accessing the market and is reviewing outstanding notes.
Many issuers delayed sales when the debt market came to a near halt in late September and early October, though the market has since begun to pick up.
"When the market started to freeze up was when we saw most of the problems, when some issuers were caught off guard and maybe went to market with a competitive sale and got no bids," said Moody's senior analyst Henrietta Chang. "As the process has gone on, what we've found is that the vast majority of issuers are planning far ahead in advance and are looking at backup plans ... We want to make sure that all of our issuers are making those plans."
In a report, the agency said that although market access problems hadn't caused any Moody's-rated Bans to default, it had "widespread anecdotal evidence of last-minute efforts to implement backup plans in order to ensure successful sales."
Moody's will begin talking to issuers four to six weeks prior to notes' maturity to assess the issuer's contingency plans for limited market access. For notes that depend on market access for payment, the assessment will include an issuer's expectation to refund maturing notes, whether the issuer is prepared to deal with potentially higher costs, plans to deal with failed competitive sales such as private placement, and access to alternative plans such as retiring notes with cash or ability to access a line of credit or a loan.
Moody's said it expects issuers with MIG-1 rated Bans to schedule take-out sales at least five business days prior to the notes' maturity.
Moody's rates roughly $4.7 billion of notes. The rating agency said it would place an issuer's Ban rating on watch list for possible downgrade if there were any material concerns about the likelihood or timeliness of payment.
Issuers sell short-term Bans with the expectation that they will fix them out with long-terms bonds, though issuers sometimes retire outstanding notes with new notes before selling bonds.
Despite disruption in the market, Ban issuance through October is only slightly down from where it was at the same time last year. Issuers had sold $11.09 billion of Bans through October this year compared to $11.93 billion through October 2007, according to Thomson Reuters. Bond issuance in the same period fell to $342.04 billion from $370.3 billion and October issuance, at $21.55 billion, was the lowest it's been since 2000.
New York Comptroller Thomas DiNapoli in a report yesterday also warned local issuers that they need to have contingency plans when selling Bans, revenue anticipation notes, and tax anticipation notes in case they have trouble accessing the market.
In September, the Erie County Fiscal Stability Authority was unable to sell $75 million of Rans and $84.7 million of Bans. The county, which faced the possibility of not meeting payroll and other expenses, had a contingency plan for the Rans, which it privately placed with Bank of America NA.
Assistant comptroller John Traylor said that the state comptroller's office wanted to "raise a cautionary flag" for issuers ahead of a regular period of short-term borrowing in the winter and spring of 2009. Traylor said that his office has seen an increase in the number of competitive deals that had a single bidder and that some issuers have turned to negotiated sales.
"The disruption that we've seen in the market unfortunately doesn't look like it's going to go away any time soon," he said. "We just wanted to make sure that folks understand that it's not business as usual anymore."