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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: russwinter who wrote (64662)	6/27/2006 1:55:25 PM
From: shades	Read Replies (1) \| Respond to of 110194

Moody's Tests Water For Equivalent Ratings (good or bad Russ?) By Stan Rosenberg A DOW JONES NEWSWIRES Column NEW YORK (Dow Jones)--Moody's Investors Service this week has proposed to broaden the scope of "corporate equivalent ratings" it assigns to certain municipal obligations. The CERs are an attempt by the credit ratings firm to compare taxable municipal obligations to a corporate scale, given an intrinsic disparity between the two based on credit quality. "Even the riskiest municipal bonds...have extremely low default rates, lower on average than Aaa-rated corporate bonds," said Moody's analyst Naomi Richman, one of the authors of a report explaining Moody's methodology and how it might evolve. The 10-year cumulative default rate for all investment grade Moody's-rated municipal bond issuers - excluding the safest general obligation and water and sewer revenue bonds - stands at 0.2883%, the report said. That's lower than the 0.5564% rate for Aaa-rated corporate bonds. The ratings firm, which has assigned seven CERs since 2003, limits them to certain sectors and provides them by request for swaps and taxable municipal debt sold outside the U.S. It is proposing to assign them, when asked, to taxable domestic transactions. Moody's is the only firm that assigns CERs. Taxable long-term munis sold last year totaled $13.3 billion against overall municipal bond issuance of $405 billion, according to data provider Thomson Financial. Such issuance peaked in 2003 at $30 billion and has been declining since, although it could take off again if state and local governments step up their pension plan funding. About $4.9 billion of taxable bonds have been sold so far in 2006. "The benefits of mapping municipal ratings to the corporate scale are greater transparency in our ratings and the reduction of economic inefficiencies that could arise due to the existence of two distinct rating scales," Richman said. For example, many interest-rate swaps between municipal and corporate entities require bilateral posting of collateral when downgrades to certain rating levels occur, but the two counterparties are rated on different rating scales. Swaps are contracts in which investors pay or receive fixed or floating interest rates that are tied to a key barometer, such as the London interbank offered rate. They have come into increasing use by state and local governments seeking to limit interest rate risk. Additionally, overseas investors used to purchasing U.S. taxable bonds but not too familiar with the domestic municipal market occasionally are interested in taxable munis. At that point, they may want to know the equivalent corporate rating. When Illinois in May of 2003 sold $10 billion of taxable bonds to replenish its pension funds, a good deal of interest in the issue came from foreign investors. While the bonds were rated Aa3 by Moody's on its municipal scale, they were assigned a Aaa corporate equivalent rating, three credit grades higher. Broader Parameters Moody's is proposing now to expand the CERs in two other ways. It would broaden their use, which now is limited to general obligation and water and sewer revenue bonds, to all taxable sectors of the market. It also would differentiate between ratings for states and localities, producing CER rating changes in some areas. For instance, Richman said, taxable debt sold by the Detroit Retirement Systems Funding Trust, rated Baa2 on a municipal scale but Aa2 - six pegs higher - on a corporate equivalent scale, would be lowered one notch to a CER of Aa3. The city of Detroit's unlimited tax general obligation bonds have been rated below investment grade by Moody's twice in the last 25 years, most recently at Ba1 for a stretch between July of 1992 and October of 1996. While market participants aren't uniformly agreed on the notion of rating munis several credit grades higher on another rating scale, Richman said "confusion" is the main issue she hears. CERs are valuable, she said, if you're trying to compare taxable munis to bonds of IBM, AT&T and GM. "It all goes to what market you are in and how the rating is being used and making sure that it's clear." While corporate ratings measure "expected loss," muni ratings measure the "intrinsic financial strength of an entity," she said. Many municipalities can border on default but continue to pay their debts because they receive "extraordinary support from a higher level of government or from voter-approved additions to governmental power." The report cited Gulf Coast communities most severely affected by Hurricane Katrina, saying, "Many of these municipalities are likely to avoid default because they have received, or will receive, extraordinary assistance from federal and state levels of government." It also cited New York City's 1970s financial crisis that led to a State-mandated oversight board, now a common approach to fiscally stressed local units, and to widespread adoption of Generally Accepted Accounting Principles by state and local governments. "Similarly, the Orange County bankruptcy of the 1990's resulted in tighter controls on investment of government funds," it said. Moody's invited comments on its proposal until Sept. 1 at pfcc@moody's.com. (Stan Rosenberg, a veteran observer of the municipal bond industry, writes about issues and trends in the muni market for Dow Jones Newswires.) -By Stan Rosenberg, Dow Jones Newswires, 201-938-2143; stan.rosenberg@dowjones.com (END) Dow Jones Newswires June 27, 2006 11:32 ET (15:32 GMT)