Munis Back Away From Ratings-Agency Domination

In the world of credit ratings, it’s generally acknowledged that the

most overrated securities are structured products, while the most

underrated securities are municipal bonds. (You have no idea how nice

it is to be able to use the words “overrated” and “underrated” literally.)

As the credibility of the ratings agencies falls, then, the

least-affected borrowers, in terms of the price they have to pay to

access the market, are likely to be municipalities. And that seems to

be exactly

what’s happening. Historically, US municipalities have paid

$2 billion per year to bond insurers, in order to get their issues a

triple-A credit rating and appeal to the type of investors who only

want AAA-rated debt.

Now, however, investors trust triple-A ratings less than they ever

have, even as the bond insurers themselves turn out to be rather less

creditworthy than many of the municipalities they were insuring.

Reports Bloomberg’s Darrell Preston:

Many investment-grade munis would have AAA ratings

without insurance if they were ranked the same way as corporate debt.

Every state except Louisiana would be Aaa, based on the scale for

companies, which ranks borrowers on the probability of default,

according to the report by Moody’s.

Amazingly, brand-new uninsured bond issues are now trading through

insured debt from the same borrower:

When Wisconsin sold $154.6 million of bonds for

highways, public buildings and water improvements on Nov. 15, it paid a

yield of 3.87 percent for debt due in 2016. The same day, insured

Wisconsin bonds sold in October with a similar maturity yielded 4

percent in the secondary market where existing issues trade.

That makes very little sense at all, unless investors were selling the

old bonds in preparation for buying the new ones. But I am hopeful that

the news on the muni front is the first sign that the ratings agencies

are losing some of their power – and, thereby, gaining

in reliability.

(Via CR)

This entry was posted in bonds and loans. Bookmark the permalink.