CHICAGO — Executives from Fitch Ratings responded to issuer concerns on Tuesday, saying their agency does not require municipal bond issuers to sign indemnity agreements releasing Fitch from liabilities resulting from ratings.
“On the revenue side, we have not had any language in [contracts] requiring or asking the issuers to release us from liability,” Richard Raphael, managing director of U.S. public finance at Fitch, said during a session at the annual meeting of the Government Finance Officers Association.
Ann Flynn, Fitch’s managing director of business and relationship management, went further, saying in a telephone interview that Fitch typically does not require so-called indemnification provisions for public ratings of municipal issuers.
They made the remarks after Wisconsin capital finance director Frank Hoadley raised concerns about these kinds of contracts during a session called “The Changing Credit Rating Environment” and at a meeting of GFOA’s debt committee on Saturday.
Hoadley said at the Tuesday session that such contracts have resulted in “a lot of contentious discussions” between issuers and ratings firms.
“These contracts typically ... require, or have attempted to require, waiver of immunity,” he said. “It’s an attempt by the rating agency to get the issuer to stand between them and anyone who might be suing the rating agency for liability.”
Hoadley warned those attending the session that rating letters from agencies often include “contracts of adhesion” on the backside that says issuers who accept a rating also accept certain terms.
But Raphael and Flynn said Fitch does not have such indemnification provisions in their contracts.
Michael Adler, vice president of corporate communications at Moody’s Investors Service, said in an email: “Moody’s does not seek indemnification from governmental issuers in the U.S. with respect to their public ratings.”
Standard & Poor’s weighed in as well.
“While S&P expects issuers to provide investors and rating agencies with accurate and complete information, S&P does not ask PF [public finance] issuers to enter rating agreements containing indemnification provisions,” Bill Montrone, managing director and head of the U.S. public finance group, explained in an email.
Issuers complained about these kinds of indemnity provisions two years ago. Fitch said at that time that it had no such provisions in its contracts, while Moody’s said then that it would suspend the use of such provisions in the muni market.
Hoadley also said during the Tuesday session that the relationships between issuers and rating agencies have become more formal in recent years, and is lacking the friendly “banter” that existed between issuers and analysts in the past.
He said the analysts that issuers work with seem to frequently rotate out of their jobs.
In addition, he said there seems to separation between the “business of providing ratings versus the analysis.”
“It seems like the two sides of the firm are not talking to each other,” he added.
Many of Hoadley’s points were also discussed on Saturday by members of GFOA’s debt committee, which agreed to outline their concerns in an upcoming newsletter.
But Raphael said Fitch focuses on ensuring the rater has strong relationships with issuers, and that communication flows freely.
“We have definitely put a lot of emphasis on maintaining human-to-human contact,” he said.
In addition, Raphael sought to counter claims of high turnover at Fitch, noting that nearly half of the firm’s public ratings in the last three years have had the same analysts assigned to them, and nearly 90% of public ratings have had one or two analysts.
Many of those cases include instances where Fitch rotated a backup rating analyst into the lead analyst slot, or the reverse.
Flynn said one of Fitch’s top goals is to “provide analytical continuity of coverage.”
“We recognize that issuers have lots of people to talk to and we don’t want them to tell their story over and over,” Flyn said.
Raphael also discussed the impact of the Dodd-Frank Act and the financial crisis on how Fitch evaluates issuers.
He said the company’s analysts now focus more closely on criteria such a municipality’s pension liabilities, property tax income, operating budget, labor relations and strength of management.
Another speaker, Henrietta Chang, vice president and senior credit analyst at Moody’s Investors Service, said rating agencies are increasingly concerned with the timeliness of issuers’ audited financial statements.
She said financial statements are often a few years old, and a few cases Moody’s has withdrawn its ratings because issuers did not provide audited financial documents.
“We rely on audited information to provide our analysis,” Chang said. “In the public sector, particularly among local governments, audits tend to be quite delayed.”