Bonds

S&P tells 149 issuers: provide timely financials or risk withdrawn ratings

S&P Global Ratings placed 149 ratings on CreditWatch with negative implications, because they have not received 2021 financial statements from the issuers.

The rating agency put issuers — including local governments, utility and public power ratings — across the country on notice that if it doesn’t receive the audited financials within 30 days their ratings may be withdrawn.

Santa Fe, New Mexico; Danbury, Connecticut; and Scranton, Pennsylvania, were among those listed.

“We view proactive disclosure and dissemination of information as a positive management characteristic,” S&P analysts wrote. “Conversely, we view the lack of timely disclosure and information flow negatively.”

There has been a notable increase in negative rating actions due to information sufficiency and quality considerations, according to the rating agency. In 2019, fewer than 80 rating actions were taken due to a lack of timely information, according to an S&P chart.

“This year did see a marked uptick,” said S&P analyst Tiffany Tribbitt. “But this has been a perennial problem in the muni market, which has weaker disclosure than in the corporate market.”

Given the American Institute of CPAs noted an acute shortage of certified public accountants in its 2021 trends report, S&P analysts wrote, the number of delayed disclosures could increase in the near term.

“There is a significant shortage of auditors,” said S&P analyst Jaime Blansit. “I think this is a lingering issue from the pandemic and general economy. We have been hearing about staffing shortages at the state, outside auditor and local government level.”

Staffing shortages in states where state auditors have to sign off on county audited financial documents has been an issue in previous years, Tribbitt said.

Thirteen of the issuers placed on CreditWatch negative were because the state has not signed off on audited financials.

“We do see it in certain states more commonly than others,” said S&P analyst Stuart Nicol. “Alabama and New Mexico are two states we are seeing it more often, and Mississippi and Arkansas as well. Finding auditors in rural places is more difficult, so it’s definitely concentrated in more rural areas.”

And yet, California, which still has not released its audited comprehensive financial statement for 2021 holds a positive outlook from S&P and stable outlooks from Moody’s Investors Service and Fitch Ratings. It holds ratings of AA-minus, Aa2 and AA, in that order.

Both S&P and Fitch did mention in their recent ratings analysis that California’s ACFR is late.

“One credit constraint includes the state’s late release of financial audits,” S&P wrote in the California analysis.

“California does not expect to release its ACFR for the fiscal year ended June 30, 2021, at least until March 2023, and possibly later, and did not release its fiscal 2020 ACFR until February 2022, a delay that we consider very late,” S&P analysts wrote.

“However, the state has continued to release timely unaudited monthly agency cash revenue reports and controller’s monthly reports on cash receipts and disbursements,” S&P analysts wrote. “Although these are not reported on a generally accepted accounting principles basis and lack the ACFR’s required supplementary financial notes regarding pensions, OPEB and other disclosures. We believe timely release of ACFRs would aid California in reporting transparency and help validate budgetary basis disclosures and improvements in revenues and fund balances.”

“It is variable depending on the credit situation,” Tribbitt said. “California is able to provide enough timely information though their audit is late, though we have provided some disclosure around that.”

The state has blamed issues with the roll-out of its electronic accounting system, FI$CAL, for its tardy ACFRs in recent years.

“It is most frustrating that a high-profile issuer is able to sell billions in bonds without a new audit,” said Richard Ciccarone, president of Merritt Research Services, which does an annual report tracking the timeliness of audited comprehensive financial reports. “Are they saying, we trust you, but we don’t trust everyone else?”

There is no question California does have additional reporting and does provide monthly reports, Ciccarone said.

“I don’t want to take that away from them,” Ciccarone said. “It may be offsetting the late ACFR, but it would be better if they had both. Information can be revealed in an audit that is important to an investor that might not be available elsewhere.”

Ciccarone was surprised that California wasn’t among the issuers put on negative watch for having a late audit.

“I guess it’s not cookie cutter,” Ciccarone. “But if we are saying having third-party verification through an ACFR is important to confirm credibility, isn’t it important enough to weigh on the rating.”

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