–Muni Defaults To Remain Occasional
By Yali N’Diaye
WASHINGTON (MNI) – After a first muni bond rating issued last week,
Kroll Bond Ratings President and Chief Operating Officer James Nadler
told MNI more will come this summer.
Only after a few states are rated will Kroll issue an outlook for
the muni sector.
“Once we have more states ratings, then you will see from us our
general outlook,” Nadler said, adding the outlook will also include
cities.
Still, “It’s clear from our default study that we disagree with
Meredith Whitney’s findings, for instance, that we are going to see
large scale defaults and frequent defaults in the municipal area,” he
said.
Banking analyst Meredith Whitney predicted hundreds of billions of
default in late 2010, triggering a wave of redemptions from muni bond
funds that has since reversed.
No doubt states such as Connecticut, which was the first to be
rated by Kroll, do face challenges, as do cities or counties, said
Nadler.
Jefferson County, Alabama, for instance, decided to miss a general
obligation payment last week that was scheduled April 1. Moody’s said in
its Weekly Credit Outlook Monday that such a decision is “putting future
payments at greater risk.”
In general, however, state and local governments have a number of
measures they can implement to address their challenges, Nadler said.
In fact, “the vast majority of the cities, towns, states and
counties are addressing those issues,” he continued.
So while occasional defaults can and will continue to occur, he
does not expect “anything higher than the occasional default”,
especially in the rated investment grade public finance sector.
In fact, Moody’s said Monday that in the case of Jefferson County,
while the “risk of material default for GO bondholders remains high,”
the county’s bankruptcy and default “is not an indication that
bankruptcy filings or defaults by local governments in Alabama are
likely to rise materially.”
Nadler pointed out that problems in Harrisbug, Stockton, or
Jefferson County had been going on for a long time and were only
exacerbated by the financial and economic crisis.
Whether it is mismanagement, fraud, excessively generous public
employee compensations, “those problems began years ago.”
On March 29, Kroll made its entrance into the general obligation
market by assigning a ‘AA’ rating with a stable outlook to the long-term
debt of the State of Connecticut, the wealthiest state in the nation.
Currently, Nadler told MNI, “We are working with a handful of other
states.”
“You will see more public finance rating over the summer,” he
continued.
The focus will first be on frequent issuers, he said, before
branching out to “less frequent issuers.”
Whether the new entrant in the muni market will eventually rate all
states is unclear.
“We have no plans to seek ratings from Kroll,” State Treasurer Bill
Lockyer’s spokesman Tom Dresslar told MNI Thursday.
So establishing its credibility is nowhere near acquired for Kroll
Bond Ratings. Not to mention that at the regulatory level, the goal is
to reduce reliance on rating agencies.
Still, Nadler expects an acceleration of the muni rating activity,
arguing that Kroll fills in a void left by other rating agencies:
detailed information accompanying the muni ratings as well as ongoing
updates.
Nadler said investors clearly demand more information accompanying
the ratings and better explanation of the rationale, as well as updates
that will avoid a “surprise” rating change.
To help establish its credibility, the rating agency issued a
default study last year covering the period 1920 through 2010.
The default study wanted to make sure that Kroll had the
credibility, Nadler said, “in fact more credibility” than the other
agencies active in the muni bond sector.
The study concluded that “we do not foresee a material increase in
municipal defaults over the medium term.” It added, “Our findings
support the view that any resulting investor losses are likely to be
small.”
Still, the ‘AA’ rating assigned to Connecticut GO bond last week
matched both Standards & Poor’s and Fitch’s ratings. Moody’s rating was
just one notch lower.
Asked what Kroll would bring to the table, Nadler, underlining
Moody’s lower rating, stressed, “There will be ratings where we differ.”
“What we bring to the table is the credibility,” he added, arguing
that Kroll’s report for Connecticut, for instance, was “much more
detailed than the other rating agencies’ reports, which is something
that investors were really clamoring for.”
At the end of 2011, the municipal bond market outstanding was $3.7
trillion, down from $3.8 trillion in 2010.
Standard & Poor’s rated $466 billion State Tax-Supported Debt
through fiscal year 2010.
Fitch analyst Laura Porter estimates that Fitch rates about $255
billion in state GO debt alone.
Connecticut State Treasurer Denise Nappier said in a statement last
week that the AA rating assigned by Kroll applies to the state’s $14
billion of outstanding General Obligation bonds, as well as $555 million
bonds scheduled for sale in April 2012.
So clearly, Kroll has a long way to go before it can pose a threat
to Standard & Poor’s, Moody’s and Fitch Ratings.
Still, investors are likely to welcome this additional competition
if it is indeed providing additional information about issuers.
“I think municipal investors are hungry for as much credit
information as they can get, so the addition of a rating agency is a
positive,” Municipal Market Advisors managing Director Matt Fabian told
MNI.
“For Connecticut in particular, the state is running one of the
largest unfunded pension liabilities in the country, so this only
increases the interest in information,” he said.
As a result, “This is probably a very good test credit to gauge
market appreciation for Kroll.”
** MNI Washington Bureau: 202-371-2121 **
[TOPICS: M$U$$$,MR$$$$,MFU$$$]
