Moody's Investors Service has assigned an A1 rating to Virginia's state intercept program that the state uses to guarantee payment on any defaulted general obligation bonds of its localities. It is the rating agency's first-ever rating of such a state intercept program.
The new "programmatic" rating may help lower-rated localities across the state save costs when issuing bonds, sources say.
Julie A. Beglin, an assistant vice president at the rating agency, said Moody's previously did not consider post-default programs to offer value to investors and, therefore, did not rate them. "But now we have learned that investors do care about whether they will be paid at all in the event of a payment default," she said.
Moody's said the rating reflects the strong creditworthiness of the state overall, the long history of strong fiscal operations among the state's localities, and the fact that no localities there have ever called upon the intercept program to make good on a payment default. The commonwealth currently enjoys a triple-A GO rating from all three major rating agencies.
Beglin said that the high programmatic rating serves as a kind of credit backup for those localities that have a rating lower than A1.
Such localities in effect get a credit enhancement from the programmatic rating because they can assure bondholders that they will be paid with state funds in the event of a payment default, Beglin said. But obviously, if the locality already enjoys an A1 rating or higher, the programmatic rating becomes irrelevant because the local government will rely on its stronger, underlying rating, she said.
Moody's is also researching Massachusetts' state-intercept program and may rate it soon, she added.
Hyman Grossman, managing director at Standard & Poor's, said the new rating will help those few localities in Virginia that currently lack easy access to the debt market because they sell little debt and market participants are not familiar with them.
Standard & Poor's has given the intercept program an A rating since about 1980, he added.
Ronald L. Tillett, Virginia's secretary of finance, said the newly assigned rating reflects the state's successful efforts at cooperating with localities to enhance their efforts to finance capital projects at the lowest possible cost. The two agencies' ratings will assist certain lower-rated localities in the issuance of their bonds and should result in lower interest costs, which is certainly "positive" for the state's taxpayers, Tillett said.
Like intercept programs in some other states, Virginia state law requires the governor to "cure" any locality's debt service delinquency by withholding any state aid due to the defaulting government. After a bond holder or paying agent notifies the state of the default, the state treasurer is responsible for investigating the alleged default. If the default is then confirmed, the treasurer is supposed to direct the state comptroller to withhold payments of aid funds due to the local government.
