As rating agencies seek to provide more transparency and regain accountability on how they rate credits, Standard & Poor's has issued a report stating how it will suspend ratings for U.S. public finance issuers.
While Standard & Poor's said the practices for suspending ratings in the public finance sector due to insufficient information have been in place for several years, the report aims to enhance transparency and clarify the steps in the process.
"Obligors will know our time constraints and be able to respond accordingly," said managing director Steven Murphy. "Investors will be made aware, by the placement of the ratings on credit watch, of the possibility of a suspension of the rating as well as the reason for the action. This will also serve to keep our ratings current and in compliance with applicable regulatory oversight."
Standard & Poor's requests two types of information from issuers so it can maintain its ratings: annual financial reports and supplemental analytic information.
For annual financial reports, the agency will request the annual financial report and completed questionnaires and the obligor has 30 days to respond. If no information is received, the agency will make a second request and the obligor has another 30 days to respond.
If information has still not been received, the rating on the related debt of that obligor will be placed on credit watch with negative implications. The obligor then has another 15 days after the rating is placed on watch before Standard & Poor's will likely suspend the rating.
Regarding supplemental analytic information, a first request is made for information and the issuer has 15 days to respond with the documents. If no information is received, the rating agency will make a second request, and the issuer has 10 days to respond.
If information is still not supplied, the agency will make a third request for information and the rating on the related debt of that obligor will be placed on credit watch with negative implications.
If the issuer has not supplied more information within 15 days of being placed on credit watch, Standard & Poor's will likely suspend the rating.
The agency said that once the credit rating has been suspended, analysts can conduct a review and taking rating action within 90 days if they receive sufficient and satisfactory information from the obligor.
"We have long taken the stance that if we don't receive information we need in a timely manner, there is potential we withdraw the rating," analyst Geoffrey Buswick said. "We want to make sure obligors and investors know we have a process, and we try to maintain the process to make sure we have ratings that are up to date."
Buswick added that it was rare for the agency to suspend ratings, as typically the obligor wants to provide timely information. But a few misunderstandings have occurred between issuers and the rating agency. Last December, the rating agency put DeKalb County, Ga., on negative watch. And after 90 days, Standard & Poor's still didn't have information from the county, so it withdrew the rating.
"At the time, we thought in-house that when a credit is on negative watch, it was clear there would be action," Buswick said. "But the market feedback was 'you surprised us,' so we want to make our information gathering practices as clear as possible."
He said that hopefully in the future, the market will not be surprised again if a credit is suspended. But for the most part, issuers are timely in providing information. "For the most part, issuers understand the obligations they are entering into and that the marketplace needs information to understand the credit quality going forward through the life of the bond," Buswick said.