About one-third of U.S. local governments may have their credit rating raised by Standard & Poor’s (MHP) under a new methodology that the company is proposing to boost transparency and comparability.
The change would affect about 3,800 issuers, S&P said in a report today. About 65 percent of ratings may remain unchanged under the plan, while 3 percent could drop, typically by one level, S&P said.
The new criteria would use the same framework the company applies to local and regional governments outside the U.S., S&P said.
“We’re striving to have ratings that are comparable globally and with other sector ratings,” Jeffrey Previdi, one of the primary analysts on the report, said at a media briefing in Manhattan. “So the credit risk present in a AA here is the same as a credit risk present in a AA elsewhere.”
In 2010, Moody’s Investors Service (MCO) and Fitch Ratings adjusted their grading framework for the securities to make it more comparable with company debt.
The changes followed years of complaints from elected officials that rating companies were penalizing states and local governments by holding their debt to a higher standard than corporate bonds. Standard & Poor’s said that it already rated municipal bonds the way it graded other debt.
Moody’s moved to a “global scale,” affecting about 70,000 ratings, according to a company statement. Fitch moved 13,500 bond issues to the international scale.
S&P proposed ratings based on seven areas: economy, management, liquidity, budgetary performance, budgetary flexibility, debt and institutional framework. The economy score would receive a 30 percent weighting, compared with 20 percent for management. The others would account for 10 percent each.
Each area would receive a score on a scale of 1 to 5, with 1 being the strongest, and the weighted average would give the municipality an “indicative rating,” according to the report.
Local governments with liquidity scores of 4 can’t exceed a rating of A-, S&P’s seventh-highest investment grade, due to a series of “overriding factors,” according to the report. A liquidity score of 5 would automatically place a municipality below investment grade. Inadequate management and general-fund balance are other criteria that could impose a ratings cap.
The change would affect ratings on municipal governments that aren’t special-purpose districts, according to the report. Cities, counties, towns, villages, townships and boroughs would be included, while school districts would be among those excluded.
The proposed move comes as S&P’s municipal ratings actions already “have a generally more positive tone,” according to a report from Matt Fabian at Municipal Market Advisors. So far in 2012, S&P has had 1.6 upgrades for every downgrade in the municipal market, while Moody’s has 3.7 downgrades for every upgrade, the report said.
Market participants will have 90 days to provide feedback on the changes. S&P analysts at the briefing declined to comment on when the company will release its final methodology after the period ends.
“They’re saying their munis are rated too low,” Fabian said in a telephone interview from Concord, Massachusetts. “The timing, just like it was poor for Moody’s, is poor for S&P too. There’s no good time to say your ratings are wrong.”