The one thing that seems certain in these uncertain economic times is change.
The dictionary definition of recalibrate is to determine, check, or rectify the graduation of any given scale of measurement – all over again.
And that’s exactly what’s happening in the world of municipal bond ratings, as two of the three major rating agencies recently began their recalibration of municipal rating scales. The move has been met with both support and skepticism within the industry.
Regardless of which side of the fence your opinion falls, the changes are underway. Following is a summary of recent actions by Fitch, Moody’s and Standard & Poor’s, with links to additional websites to visit for more information.
(Note: registration is free, but required to access portions of Fitch’s, Moody’s and Standard & Poor’s websites, including some press releases and articles.)
Fitch Ratings implemented ratings recalibrations of U.S. states, Puerto Rico, the District of Columbia and New York City on April 5, 2010, with further recalibrations to be put into effect on April 30. According to Fitch, “The intent of the recalibration is to ensure a greater degree of comparability across Fitch’s global portfolio of credit ratings. This recalibration will affect ratings in the state and local government tax-supported, water/sewer, public power distribution-only, and public higher education sectors.”
On April 16, 2010 Moody’s Investors Services began the recalibration of its municipal bond ratings in order to “enhance the comparability of ratings across the Moody’s-rated universe.” Although the move to a global rating system will result in an upward shift, Moody’s would prefer that market participants view the recalibrations not as rating upgrades, but rather, as recalibrations to a different scale.
Standard & Poor’s Financial Services already uses a global rating scale across the structured finance, corporate, and government sectors. In a November 2009 press release, discussing the recalibration of Standard & Poor’s (S &P) ratings for collateralized debt obligations and residential mortgage-backed securities, Chief Credit Officer Mark Adelson says, “Comparability of ratings is important because ratings can serve as a common vocabulary to describe credit risk. When ratings are comparable across sectors, investors can better use them to compare the credit risk of securities in different sectors, thereby helping them to assess whether there are potential discrepancies in the pricing of credit risk in different sectors.”
- National League of Cities – Nation’s Cities Weekly: Rating Agencies Move to Recalibrate City Ratings
- National Association of Bond Lawyers: Idea of the Week: A Recalibrating Muni Ratings and Rating Muni Raters
- DerivActiv: “Fabian of MMA Says the Ratings Recalibration Will Result in an ’Increasing Trend towards Commoditization’” (podcast)