The Role of the Rating Agencies
Edward A. Rabson Muncipal Credit Analyst Landesbank Hessen-Thuringen (Helaba)
When investing in municipal bonds, the investor’s primary concern is the issuer’s ability to meet its financial obligations, the full payment of its debt service on a timely basis. Over time, as shown in various municipal default studies, most municipal bond issuers have an outstanding record of meeting principal and interest payments in a timely manner. Issuers disclose information on their financial condition through various documents that are publicly available for an investor to review. However, not all investors have the time, ability, and training to access and review such data and reach an accurate determination of the issuer’s ability to meet its financial obligations.
Another avenue open to an investor to evaluate an issuer is to examine its credit rating. Credit ratings are important benchmarks as they reflect a professional assessment of the issuer’s ability to meet its financial obligations. Many municipal bonds are rated by one or more of the three recognized credit rating agencies: Moody’s Investors Service, Standard & Poor’s, and Fitch Ratings. While a number of the banks, brokerage firms and mutual funds have their own research departments which also analyze municipal bonds, credit ratings provided by the municipal rating agencies receive general market acceptance.
Rating agency credit evaluations are intended to measure the probability of ...