Municipal Bond Ratings

What is a Bond Rating

A bond rating performs the isolated function of credit risk evaluation. A bond rating does not constitute a recommendation to invest in a bond and does not take into consideration the risk preference of the investor. While many factors go into the investment decision making process, the bond rating is often the single most important factor affecting the interest cost on bonds. 

There are three major rating agencies for municipal bonds: Moody's Investors Service, S&P Global (formerly Standard & Poor's) and Fitch Ratings. Of the three rating agencies, S&P Global and Moody's rate over 80% of all municipal and corporate bonds.

Rating Criteria

In assigning a rating for general obligation bonds the rating agencies assess the following factors:

   Economy

   Debt Structure

   Financial Condition

   Demographic Factors

   Management practices of the governing body and administration

The above criteria are also used to analyze revenue bonds and lease obligations although additional credit criteria is considered (e.g. users and user charges for utilities) and the covenants and protections offered by the bond documents are highly important.

Rating agencies use mathematical ratios to compare an issuer to others; however, a rating is not a scientific evaluation and subjective evaluation appears to also play a role in the final rating assigned.
 

Rating Grades

Moody's "investment grade" ratings (ratings in the Baa category or higher in contrast to lower rated issues that are considered speculative) are described below.

“Aaa” - Issuers or issues rated Aaa demonstrate the strongest creditworthiness relative to other U.S. municipal or tax-exempt issuers or issues. 

“Aa” - Issuers or issues rated Aa demonstrate very strong creditworthiness relative to other U.S. municipal or tax-exempt issuers or issues. 

“A” - Issuers or issues rated A present above-average creditworthiness relative to other U.S. municipal or tax-exempt issuers or issues.  

“Baa” - Issuers or issues rated Baa represent average creditworthiness relative to other U.S. municipal or tax-exempt issuers or issues.

Bonds in the Aa, A, and Baa are also assigned "1", "2" or "3" based on the strength of the issue within each category. Accordingly, "A1" would be the strongest group of A securities and "A3" would be the weakest A securities.

S&P's ratings are similar except that all letters are capital letter and ratings within a rating category are assigned a "+" for the strongest credits within a group or "-" for the weakest credits within a group.

The following table shows the comparable investment grade ratings of the three major rating agencies:

 

Moody's

S&P Global

Fitch

Best Quality

Aaa

AAA

AAA

High Quality

Aa1
Aa2
Aa3

AA+
AA 
AA-

AA+
AA 
AA-

Upper Medium Grade

A1
A2
A3

A+

A-

A+

A-

Medium Grade

Baa1
Baa2
Baa3

BBB+
BBB 
BBB-

BBB+
BBB 
BBB-

Rating Links

 

The following are external links to websites for the major bond rating agencies and links to sites relating to
bond ratings:

 

Role of WM Financial Strategies

For your bond issue, WM Financial Strategies will explore the feasibility of obtaining a bond rating, a municipal bond insurance policy or selling the securities unrated (see Bond Insurance). If it is determined that a rating is desirable,  WM Financial Strategies will implement an action plan designed to secure the highest rating possible for your bond issue. A rating strategy is prepared to specifically address your credit condition and the rating process for your issue.  During periods in which no bond issues are being considered, WM Financial Strategies is available to explore methods for retaining or enhancing your credit standing. In addition rating agencies are required to undergo routine reviews of the ratings they have assigned.  If a municipal entity is placed under a formal review process, WM Financial Strategies can assist you in preparing responses to rating questions or conducting a rating review call.

 

 

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DISCLAIMER: The material contained at www.Munibondadvisor.com is for informational purposes only and is not an offer to sell or a solicitation to buy any security. Nothing contained herein should be viewed as investment advice or as constituting a recommendation to buy, hold or sell the obligations referred to herein. WM Financial Strategies is an independent financial advisor serving government entities exclusively and is not a broker dealer. Nothing contained herein should be considered as advice to any governmental entity. WM Financial Strategies makes recommendations to its governmental clients only after a complete review of their particular financial needs and circumstances and such circumstances and needs often require the additional assistance of nationally  recognized bond counsel or other legal representative.  Links to any external websites are intended for information purposes only and are not an endorsement or concurrence with any opinion, service or product referenced at the site.

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