MASBO Fall Conference · The ABCs of Rating Categories . 10/25/18 2 ... v Insurance (Build America...
Transcript of MASBO Fall Conference · The ABCs of Rating Categories . 10/25/18 2 ... v Insurance (Build America...
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Arcelia Detert and Chuck Upcraft Presented By: PFM Financial Advisors LLC
October 25, 2018
Understanding Rating Criteria and Preparing for the Rating Call
MASBO Fall Conference
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The ABCs of Rating Categories
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Municipal Bonds - Rating Basics
à What is a credit rating?
• A credit rating is simply an opinion on the ability of a borrower to repay an obligation
• Based on an alphabetic/numeric symbol used to give relative indications of credit quality
à Why do we need a rating?
• It provides investors a glance on the health of the District and is helpful to attract and secure investors
• Unless an issuer cannot achieve an investment grade rating, a rating is considered obligatory for the sale of any major bond issue
à Who are the rating agencies?
• Three main rating agencies: Moody’s Investor Services, S&P Global Ratings and Fitch Ratings
• Kroll Bond Rating Agency begun providing municipal bond ratings to specific states and credits (e.g. Wisconsin, Connecticut, Airport)
à Moody’s, S&P and Fitch have a rating for the State of Minnesota School District Credit Enhancement Program
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Moody’s Rating Categories
Source: Rating Symbols and Definitions, January 2013. Guide to Moody’s US Municipal Ratings and Rating Process
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S&P Rating Categories
Long-Term Issuer Credit Ratings
AAA An obligor rated 'AAA' has extremely strong capacity to meet its financial commitments. 'AAA' is the highest issuer credit rating assigned by Standard & Poor's.
AA An obligor rated 'AA' has very strong capacity to meet its financial commitments. It differs from the highest-rated obligors only to a small degree.
A An obligor rated 'A' has strong capacity to meet its financial commitments but is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligors in higher-rated categories. However, the obligor's capacity to meet its financial commitment on the obligation is still strong.
BBB An obligation rated 'BBB' exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.
BB, B, CCC, CC and C
Obligations rated 'BB', 'B', 'CCC', 'CC', and 'C' are regarded as having significant speculative characteristics. 'BB‘ indicates the least degree of speculation and 'C' the highest. While such obligations will likely have some quality and protective characteristics, these may be outweighed by large uncertainties or major exposures to adverse conditions.
D An obligation rated 'D' is in payment default. The 'D' rating category is used when payments on an obligation, including a regulatory capital instrument, are not made on the date due even if the applicable grace period has not expired, unless Standard & Poor's believes that such payments will be made during such grace period. The 'D' rating also will be used upon the filing of a bankruptcy petition or the taking of similar action if payments on an obligation are jeopardized. An obligation's rating is lowered to 'D' upon completion of a distressed exchange offer, whereby some or all of the issue is either repurchased for an amount of cash or replaced by other instruments having a total value that is less than par.
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Rating Distribution
CategoryNo.ofSchool
Districts %ofTotal CategoryNo.ofSchool
Districts %ofTotalAaa 3 2.01% AAA 2 2.25%Aa1 3 2.01% AA+ 2 1.34%Aa2 15 10.07% AA 9 6.04%Aa3 28 18.79% AA- 12 8.05%A1 51 34.23% A+ 50 33.56%A2 28 18.79% A 10 6.71%A3 14 9.40% A- 2 1.34%Baa1andbelow 7 4.70% BBB+andbelow 2 1.34%
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Moody'sRatingDistribution S&PRatingDistribution
Median A1 A+
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Enhanced Rating and Underlying Rating
à Enhanced Rating
v Minnesota School District Credit Enhancement Program (“CEP”)
• Moody’s rates the CEP “Aa2” - One notch below the State’s credit rating of “Aa1”
• S&P rates the CEP “AAA” – At par with the State’s credit rating of “AAA” (recently on 09/18)
v Insurance (Build America Mutual & Assured Guarantee)
• Rating based on the Municipal Insurance Company’s rating
à Underlying Rating
• Evaluation of the stand-alone credit quality of the issuer
• Subject to rating criteria and rating process
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Current Methodologies
1. Moody’s US Local Governments General Obligations
2. Moody’s Adjusted Pension Liability
3. MFRA Rating Indicator
4. Moody’s US Public Finance Special Tax
5. Moody’s Public Power Retail Systems
6. Moody’s Bond Anticipation Notes
7. Moody’s Housing Finance Agencies
8. Moody’s Utility Revenue Debt
9. Moody’s Global Higher Education Debt
10. Moody’s Government Owned Toll Roads
11. Moody’s Public Port Revenue Bonds
12. Moody's Publicly Managed Airports Calculator
13. Moody's Lease, Appropriation, and Moral Obligation Calculator
14. Moody's Not-For-Profit Healthcare Calculator
15. Moody's Not-For-Profit Organizations
16. Moody’s U.S. States and Territories
1. S&P’s US Local Governments General Obligations
2. S&P’s Higher Education Debt
3. S&P’s Waterworks, Sanitary Sewer, and Drainage Debt
4. S&P's State Ratings Calculator
5. S&P's Healthcare Ratings Calculator
Moody’s S & P
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Rating Criteria
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Minnesota School District Medians by Moody’s
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Minnesota School District Medians by S&P
Source: S&P Global Ratings, Median and Credit Factors: Minnesota, July 18, 2017.
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Moody’s Scorecard Factor and Weights
Source: Moody’s Investors Service Rating Methodology – US Local Government General Obligation Debt published December 16, 2016.
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Moody’s Rating Assignment
à The Scorecard – Provides a standard platform from which to begin viewing and comparing local government credits
à “Below-the-Line” Adjustments - “Idiosyncratic factors that are likely not to apply to all issuers, but that can impact credit strength”
à Final Rating - Determined by a Committee of experts
Moody's Local Government Rating Calculator
Category Weight Indicated RatingEconomy/Tax Base 30% 2.67
Fund Balance 15% 4.67Cash Balance 15% 2.00Management 20% 2.50Direct Debt 10% 2.50
Pension Liability 10% 4.50Indicated Rating Score 100% 3.00
Indicated Rating - A2
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S&P Factors and Weights
Source: Standard & Poor’s Ratings Services, U.S. Local Governments General Obligation Ratings: Methodology and Assumptions, September 12, 2013.
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S&P Rating Assignment
Source: Standard & Poor’s Ratings Services, U.S. Local Governments General Obligation Ratings: Methodology and Assumptions, September 12, 2013.
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S&P Financial Management Assessment
à Fund Balance Policy
à Long-Term Financial Planning
à Long-Term Capital Planning
à Investment Management Policies
à Debt Management Policies
à Reserve and Liquidity Policies
Source: S&P Global Ratings, Median and Credit Factors: Minnesota, July 18, 2017.
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The Rating Call
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Timing Schedule of Rating Process
Week Task Week 1 Prepare Preliminary Official Statement and Rating Presentation
At least one week before Rating Call
Provide available documents (e.g. Preliminary Official Statement, Audited Financial Statements, Budgets, Written policies and procedures) that will help guide the conversation
A couple of days before Rating Call
Provide Rating Presentation
At least two weeks before Bond Sale
Rating Call with District, Municipal Advisor and Rating Agency
Rating Committee Meeting – Final determination of credit rating
One week – a few days before Bond Sale
Receive Rating – District and Municipal Advisor must review draft rating report and provide comments on factual errors and material non-public information
Final Week Bond Sale
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Rating Presentation
à Economy
• Work force
• Major developments in the area
• Valuation trends
• Historical enrollment and trend
à Finances
• Fund Balances trend and % of revenues
• Cash Balances trend and % of revenues
• Budgets comparison to actual and goals
à Debt
• Direct debt
• Future borrowing plans
à Management
You've got to accentuate the positive Eliminate the negative
Latch on to the affirmative Don't mess with Mister In-Between
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Preparing for a Rating Call
à After a Rating Agency has reviewed the sale-related documents, they will circulate a list of questions at least 2 days ahead of the rating call
à Review the list of questions and be comfortable with the answers
à Strongly recommended to include your financial advisor on any rating call, as they can help direct questions and/or responses to the rating analyst questions
à Have a pre rating call discussion with your financial advisor to make sure you are comfortable with each rating agency question provided
à Consider whether any responses include material, non-public information
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What Can I Do To Improve My District’s Rating?
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How Can We Improve Our Rating?
à Within the District’s Control
• Consider reviewing/revising policies
• Long-Term Capital Planning
• Maintain strong fund and cash balances
• Consistent Budget Practices
à Outside the District’s Control
• Economy
• Wealth Levels
• State Policies - Determination and timing of State Aid
• Pension Liabilities
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The Value of a Strong Credit Rating
à Strong credit ratings will result in lower cost of borrowing.
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
Long-Term (20 Year) Municipal General Obligation Credit Spreads
AAA to AA Spread AAA to A Spread AAA to BBB Spread
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Responsibilities of Holding a Rating
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Enhanced Rating (School District Credit Enhancement Program)
à Must be bound by Minnesota Statutes, Section 126C.55
à Debt service payments must be deposit with the Paying Agent three (3) business days prior to the payment due date
à If potential default on debt service payments - notify the Department of Education ASAP but not less than 15 working days prior to payment due date
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Things to be Aware of . . .
à Financial and policy decisions in your District that may have an impact on the financial condition of the District and affect the rating
à Surveillance
• Provide requested information
• Involve your Municipal Advisor
• Participate in the surveillance call if requested
• Review report
à Continuing Disclosure (MSRB Rule 15c2-12)
• Compliance with Continuing Disclosure Requirements
• Material Event Notices - Rating Changes
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Chuck Upcraft Arcelia Detert Senior Managing Consultant Senior Managing Consultant
Years of Experience: 17 Years Years at PFM: 15 Years
Phone: 612-371-3749 [email protected]
Years of Experience: 30 Years Years at PFM: 15 Years
Phone: 612-371-3731 [email protected]
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Questions?