Bonds

Subtle rule changes have issuers on edge

The credit rating agencies are proposing changes to their criteria that could affect a wide swath of municipalities, which is causing issuers to scramble to keep up.  

“There’s such a large volume of information coming from a lot of different sources,” said Emily Brock, director, federal liaison center, Government Finance Officers Association. “Are there changes, that they (issuers) don’t, see? How many changes have been made that you didn’t know were coming?” 

The comments came during the meeting of the Debt Committee at the GFOA conference held on Saturday in Orlando, Florida. 

“There’s such a large volume of information coming from a lot of different sources,” said Emily Brock, director, federal liaison center, Government Finance Officers Association. “Are there changes, that they (issuers) don’t, see? How many changes have been made that you didn’t know were coming?” 

Donna Alberico

One member of the Debt Committee cited an example in her area saying that expectations are indicating that 50% of the local ratings would change due to the new criteria, most of which would compute out to ratings increases.

Fitch Ratings and S&P Global Ratings have both been tweaking their standards for determining credit ratings and asking the industry to publicly comment on the proposed changes. The GFOA responded to Fitch via a letter last November and responded to S&P via a letter in March. 

The changes being proposed by Fitch installs a model based on quantitative data opposed to qualitative to help tease out conclusions.  

“The rating criteria change was changing to a more empirical structure, meaning numbers based,” said Brock. “But I think we need to remain vigilant, because if you change something that was a bit more normative into something empirical, does the number explain the whole criteria, or the whole financial picture that we’re trying to paint?” 

GFOA’s letter to Fitch highlights three areas it would like to see addressed including improved access to the agency’s new model, better outreach to the issuers being affected and more transparency on the “observed calculations and weight being implemented in the new model.” 

The changes being proposed by S&P include putting more emphasis on population levels, which possibly puts smaller cities at a disadvantage. 

“Fitch’s proposed and comprehensive changes to its local government ratings criteria, as noted within the exposure draft, will impact 35% of its local government ratings,” GFOA wrote to the agency. “Such a significant effort and result should warrant substantial outreach, transparency, and accountability to local governments both specific to individual entities and within industry forums.”

S&P says its changes will only affect 5% of its U.S. government ratings but GFOA is still pressing for “substantial outreach, transparency, and accountability to all governments who will be rated under these criteria both specific to individual entities and within industry forums.”

GFOA also wants S&P to directly contact issuers as opposed to data dumping changes via one of the firm’s Under Criteria Observation news blasts.  

Per GFOA’s letter to S&P, “Posting a UCO list is not sufficient notification. Governments that have a potential rating change under the new criteria must be able to fully understand why the rating has been placed on the UCO list and be given an opportunity to discuss why a rating should or should not change.” 

The subtle but possibly impactful changes are coming to the surface as many smaller issuers are just learning that the rules are in flux and may not have the resources needed to respond via public comments on a very technical subject. 

“We see the big criteria changes, and we alert everyone,” said Brock. “But with all these little things, we should be more deliberate about what’s happening.”  

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