Moody's "Recalibration" Could Impact Your Municipal Rating

by Jon North, Financial Advisor

For the past two years, Standard & Poor's and Moody's Investors Service have had increasingly divergent opinions on municipal bond credit. However, beginning in April 2010, Moody's announced it will "recalibrate" its municipal ratings to the global rating scale which could increase some municipal credit ratings.

In recent years, while S&P was improving (upgrading) municipal bonds left and right, Moody's put the entire local government sector on negative outlook. Moody's will now begin upgrading municipal ratings like S&P has been doing for the past two years. Moody's is careful to note this does not reflect a change in their opinion of overall credit, but this recalibration simply creates equality in rating definitions between the municipal and corporate rating scales.

Ironically, one week after Moody's announcement, Fitch, another rating agency, announced it too was "recalibrating" its ratings. So what do these recent actions mean? We'll focus on Moody's, as they have a bigger presence in the Midwest.

Who is most impacted by this recalibration?
The lower your current Moody's rating, the bigger the impact. If your community has a Aa1 - Aa3 rating, you may see a one notch upgrade. If you are currently rated A1 - A3, you may see a two notch upgrade, and if you are currently rated Baa, you may see a two or three notch upgrade. However, if the current rating is Ba1 or below, there will be no recalibration.

So does this mean that upgraded/recalibrated bonds will get better interest rates?
Perhaps in the short-term, but in the mid-to-longer-term, the market will begin to absorb the increased volume of higher-rated municipal debt resulting in an equalizing impact. All things being equal, you will likely pay about the same interest rate as before.

So what rating agency should I use going forward?
The recent pricing benefits of using S&P will erode somewhat. However, anecdotally, it seems that S&P will still have a slight rating advantage (higher ratings) over Moody's even after the April recalibration. Your Ehlers financial advisor can walk you through the pros and cons of each agency, and what to expect from their analytic questions.