What is a Bond Rating
A bond rating performs the isolated function of credit risk evaluation. A bond rating does not constitute a recommendation to invest in a bond and does not take into consideration the risk preference of the investor. While many factors go into the investment decision making process, the bond rating is often the single most important factor affecting the interest cost on bonds.
There are three major rating agencies for municipal bonds: Moody's Investors Service, Standard & Poor's, and Fitch Ratings. Of the three rating agencies, Standard & Poor's and Moody's rate over 80% of all municipal and corporate bonds.
In assigning a rating for general obligation bonds the rating agencies assess the following factors:
Management practices of the governing body and administration
The above criteria are also used to analyze revenue bonds and lease obligations although additional credit criteria is considered (e.g. users and user charges for utilities) and the covenants and protections offered by the bond documents are highly important.
Rating agencies use mathematical ratios to compare
an issuer to others; however, a rating is not a scientific evaluation and
subjective evaluation appears to also play a role in the final rating
Moody's "investment grade" ratings (ratings higher than Baa in contrast to those rated lower that are considered speculative) are described below.
"Aaa" - Bonds rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk. Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues.
"Aa" - Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long-term risks appear somewhat larger than in Aaa securities.
"A" - Bonds which are rated A possess many favorable investment attributes and are to be considered as upper medium grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment sometime in the future.
"Baa" - Bonds which are rated Baa are considered as medium grade obligations; i.e., they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well.
Bonds in the Aa, A, and Baa are also assigned "1", "2" or "3" based on the strength of the issue within each category. Accordingly, "A1" would be the strongest group of A securities and "A3" would be the weakest A securities.
The following table shows the comparable investment grade ratings of the three major rating agencies:
The following are external
links to websites for the major bond rating agencies and links to sites
Role of WM Financial Strategies
For your bond issue, WM Financial Strategies will explore the feasibility of obtaining a bond rating, a municipal bond insurance policy or selling the securities unrated (see Bond Insurance). If it is determined that a rating is desirable, WM Financial Strategies will implement an action plan designed to secure the highest rating possible for your bond issue. A rating strategy is prepared to specifically address your credit condition and the rating process for your issue. During periods in which no bond issues are being considered, WM Financial Strategies is available to explore methods for retaining or enhancing your credit standing.