Is it dangerous for a municipality to talk about filing for bankruptcy protection?
Standard & Poor's says no. Talk about it all you want. Just don't do it.
In a brief report yesterday, the rating agency assured investors and municipalities that mere talk of bankruptcy was not enough to threaten an issuer's rating.
Managers can discuss bankruptcy to gain more information or to describe a course a municipality may be on over the long term, Standard & Poor's said.
That is no reason to spark a downgrade. If anything, the agency's analysts believe an honest assessment of bankruptcy enhances credit quality because it forces municipalities to understand the consequences of their fiscal management.
Standard & Poor's issued the report in response to the omnipresent buzz about municipal defaults.
The fiscal stress that gives rise to municipal defaults could trigger a downgrade, Standard & Poor's said. Talking about that fiscal stress would not.
"While the mere mention of a possible Chapter 9 bankruptcy filing might seem to be cause for immediate credit concern, we believe that recent bankruptcy cases involving issuers of rated credits show that the circumstances giving rise to a discussion of Chapter 9 can vary considerably," Standard & Poor's said.
Those circumstances include trying to understand bankruptcy better and illustrating the long-term path an issuer is on.
Two examples come from California: Stockton and Oakland. Standard & Poor's affirmed its rating on both issuers despite speculation they would file for bankruptcy protection.
Another example is the Detroit School District. A state-appointed emergency manager talked about possibly filing for bankruptcy protection.
Standard & Poor's did not penalize the issuer with a downgrade just for having the conversation.
The rating analysts believes municipal bankruptcies will remain infrequent.
"Although the economy and financial markets continue to struggle, Standard & Poor's believes that the credit quality of municipalities and school districts generally remains stable," the report said.