The higher a muni bond’s credit rating, the less likely it is to change, according to a study published yesterday by Standard & Poor’s.
Publishing the third municipal bond default study in the past few months, Standard & Poor’s affirmed yesterday what most investors have assumed for years — muni bonds hardly ever default.
During 2006, there were only two Standard & Poor’s-rated credits that defaulted, and one of these was only due to a “procedural error” and was not included as a default in the study released yesterday. An issue of Massachusetts Port Authority special facilities bonds sold for a Delta Air Lines Inc. project was the only credit-based default last year, the study said.
Standard & Poor’s annual default studies focus on the likelihood that the credit ratings of certain types of bonds will change over the course of time. The data will be helpful to those on both sides of the municipal bond investment spectrum, the study said.
“For instance, investors restricted by law or inclination to holding high-investment-grade bonds would want to assess the likelihood that their investments will maintain high-grade ratings from Standard & Poor’s,” according to the study. “Conversely, investors buying high-yield bonds in hopes of profiting from a rating upgrade would be able to gauge that expectation realistically.”
For example, the study shows that about 2% of BB-rated higher education bonds will default within their first year, and that about 8% of them will default within three years. In any given year, about 85.7% of these credits are likely to keep their BB rating, while 6.12% of them are likely to be upgraded to BBB.
At the top of the credit scale, however, 98% of AAA-rated higher education bonds will still have their AAA one year later, according to the study’s data, which analyzes several other sectors of the muni market.
The data, compiled from Standard & Poor’s-rated credits sold during the last 20 years, also showed that the share of public debt rated AA or better has continued to rise.
Standard & Poor’s has now done default studies for corporate bonds, municipals, sovereigns, asset-backed securities, residential mortgage-backed securities, and a host of other asset classes, said Colleen Woodell, chief quality officer in Standard & Poor’s municipals rating group. Woodell, who was the primary analyst for the default study, added that it is now time to piece these studies together and compare how the ratings compare across different asset classes.
She said that, while muni bonds default less frequently than their corporate cousins with corresponding ratings, she wonders if municipal bonds are any safer than credits in the growing realm of structured finance.
Standard & Poor’s will publish just such a study toward the end of 2007, Woodell said.
