SAN FRANCISCO - Are municipal bond issuers ready to face the same reporting and disclosure standards rating agencies and investors apply to corporate borrowers?
Be careful what you wish for, warned Terry Goode, head of tax-exempt research at Wells Capital Management, commenting yesterday from the audience at The Bond Buyer's symposium on the municipal credit crunch here.
"You want a triple-A rating and a global scale, are you going to disclose like a corporate?" Goode asked, saying the change could "backfire" on muni issuers that take as long as nine months to file their annual financial reports.
Government officials - including Oregon Treasurer Randall Edwards, California Treasurer Bill Lockyer, and House Financial Service Committee chairman Barney Frank, D-Mass., have criticized credit rating agencies for allegedly subjecting municipal bond issuers to tougher rating standards than corporate issuers.
A muni with a very low default risk carries a much lower rating than a corporate with the same risk, costing taxpayers billions of dollars in higher interest rates and insurance premiums, the argue.
Municipal issuers are not seeking changes to help sophisticated institutional investors, retorted Laura Lockwood-McCall, debt management director for Oregon's Edwards. It is retail investors who are confused by the current ratings, which make local government bonds look riskier than they are.
"The muni scale scares off potential buyers," she said, noting that sophisticated investors benefit from this lack of other bidders.
And don't get her started on disclosure. She said Oregon spends significant resources giving investors the best possible disclosure. She spends several months of each year working on disclosure but sees little benefit when it comes time to price deals.
"If you're a good issuer and do a good job, you should get a better rating" and lower borrowing costs, she said.
While they were quick to point out that they understand the difference between the muni and corporate credit ratings, a panel of investors from across the muni market agreed muni issuers would see better demand if there was a global ratings scale.
"I definitely can see brokers calling their clients and saying, 'Hey, look, these are triple-A rated securities. They're safe,' " said Julio Bonilla, also of Wells Capital Management.
"If you look at the historical analysis [of defaults], a global ratings scale wouldn't be such a bad thing," said Ross Berger, a vice president at Wells Fargo's securities investment group and proprietary portfolio group.
He said a global rating scale runs the risk of lulling investors into treating munis like commodities that are all the same, but it would also bring in retail investors, money market funds, and banks that have to meet risk-adjusted capital requirements.
"It would really move California's cost of funding," he admitted.
As for Lockwood-McCall's complaint that her state isn't getting rewarded for good disclosure and responsible financial management, he noted that many risky collateralized debt obligations bore low rates until the recent crisis, making it look like stronger credits were being neglected.
But when the lights shined anew on credit risk in recent months, strong credits benefited, Berger said. He said investors could shine that same light on disclosure practices at some point.
Lockwood-McCall said she'll be prepared.