American Municipalities Offer Less Info, More Debt

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You might think that after the blunders of the recent past, public borrowers would have learned the lessons of 2008, but that would be wrong. Rather than increasing the information available, municipalities are providing less transparency to lenders. Gunjan Banerji and Heather Gillers write in The Wall Street Journal:

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U.S. cities and counties are using fewer ratings to assess the risks of the bonds they sell, providing investors with just one opinion on an increasing amount of new debt.

Roughly 25% of the dollar value of all municipal debt issued this year carried a single grade from one of the major ratings firms, according to Municipal Market Analytics data as of Oct. 3. If that percentage holds through the end of the year, it would be the highest since the research firm began tracking the data in 2006. For the riskiest debt, the single-grade ratio by dollar volume was 37%.

Municipal officials and advisers said fewer ratings help cities trim expenses and save time when they borrow money for everything from school construction to sewer repairs. Bond issuers typically pay rating firms to issue a report. But some analysts said opting for one grade from a single firm puts smaller investors at a disadvantage as less information circulates through the $3.8 trillion municipal market.

“Mom-and-pop investors and small asset managers without their own research staff are at a disadvantage,” said Matt Fabian, a partner with Municipal Market Analytics.

Scores attached to municipal debt are important in the public finance world because investors rely on these opinions to help make decisions about buying or selling bonds that governments use largely to pay for new construction projects. The grades range from gold-plated triple-A to several levels of “junk.”

The largest graders are S&P Global Inc.,Moody’s Corp. and Fitch Ratings, which together are responsible for 96% of all global bond ratings among firms registered with U.S. regulators. Some municipalities are required by statute to get grades of a certain quality from at least one ratings firm before borrowing

E.J. Smith - Your Survival Guy

E.J. Smith is Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. His focus at all times is on preparing clients and readers for “Times Like These.” E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH. His first drum set was a 5-piece Slingerland with Zildjians. He grew-up worshiping Neil Peart (RIP) of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West (RIP JB) and Paris. Please get in touch with E.J. at ejsmith@yoursurvivalguy.com To sign up for my free monthly Survive & Thrive letter, click here.