Moody’s Recalibrates


Moody’s recently announced it is changing its municipal rating scale to a uniform global scale. This change should occur by the end of April and will mean its municipal bond ratings will be directly comparable to the ratings it assigns to other bond issuers.

We thought it would be helpful if we shared with you a few of our thoughts on the subject:

  1. This change is a recalibration of Moody’s current rating system. Moody’s emphasizes that any changes to current municipal bond ratings are not upgrades or downgrades, but “re ratings” using a new global rating scale. Admittedly, Moody’s position is confusing to this writer and underscores our long held belief that a bond rating is only one metric to consider in the analysis of a municipal bond credit. We expect that many municipal bond issues currently rated by Moody’s will benefit from this new policy by receiving either higher ratings or improved outlooks. We expect positive actions to occur especially in the general obligation bond sector.
  2. If we are correct in our belief that many municipal issuers’ current ratings will benefit from this policy change, bond prices of these issuers should be positively affected and their borrowing costs should decline. Issuers that are currently lower rated should see the greatest benefit. Additionally, higher ratings will broaden investor interest in the market place as high quality investors will have a larger universe to consider.
  3. This policy change will most likely create some short-term problems with the month end pricing of affected issues. Month end municipal bond pricing is a matrix evaluation process and, one that we suspect, will experience some implementation issues with this change.
  4. The few remaining healthy bond insurers will suffer as a result of this change. Higher underlying ratings translates into fewer insurance opportunities and lower premiums received from the upgraded issuers.
  5. Municipal bond issuers will be able to increase their borrowings as a result of this policy change because their borrowing costs will lessen; many issuers will see their debt loads increase, perhaps exacerbating long term credit quality for many issuers. For us at Bernardi Securities, Inc., this means ongoing issuer credit and sector surveillance remains a sensible strategy.

We hope this brief market commentary is helpful. Please call us should you have any questions, comments or concerns.

Thank you for your continued confidence in our bond portfolio research and management process.



Ronald P. Bernardi
April 2010