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Why Bond Ratings Matter and How to Improve Yours (You’re Better Than You Think You Are!) October 19, 2010. Michael J. Seezen Michael W. Burns Shareholder, Columbia Shareholder, Greenville.
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Why Bond Ratings Matter and How to Improve Yours (You’re Better Than You Think You Are!) October 19, 2010 Michael J. Seezen Michael W. Burns Shareholder, Columbia Shareholder, Greenville The information contained herein is not legal advice. This information does not create an attorney-client relationship between you and McNair Law Firm, P.A. Please contact an attorney if you have a legal issue that you wish to discuss.
Ratings Basics • How Do I Get a Rating? • The Ratings Process • Keeping/Maintaining a Rating • Questions Rating Agencies Won’t Answer Directly • Recent Events/Other Considerations
Ratings Basics • What is a rating? • Opinion about relative credit risk. • Not investment advice or buy, hold or sell recommendation. • Not indication of market liquidity/price. • Not guarantee of credit quality or future credit risk.
Ratings Basics • Who issues ratings? Independent third parties, not employees or agents of issuers, underwriters or bond purchasers • Standard & Poor’s (S&P) • Moody’s Ratings Service • Fitch Ratings
Ratings Basics C. Why do I want a rating? Source: Merchant Capital, LLC
Ratings Basics D. Do I need a rating? • Private Placements vs. Public Offerings • Short term (BAN/TAN) vs. Long term maturity • Size of the deal • Type of deal a. Insurance b. Letter of Credit c. Standby Bond Purchase Agreement • How recent was your last rated deal? • How many ratings do I need?
Ratings Basics • What are ratings scales? S&P -
Ratings Basics Moody’s -
Ratings Basics Moody’s -
Ratings Basics Moody’s -
Ratings Basics Moody’s -
How Do I Get a Bond Rating? Who are the contacts at the Rating Agencies? • S&P: Richard Marino 55 Water Street New York, New York 10041 Richard_marino@standardandpoors.com 212.438.2058 • Moody’s:Julie Beglin 7 World Trade Center 250 Greenwich Street New York, New York 10007 Julie.Beglin@moodys.com 212.553.4648
How Do I Get a Bond Rating? Who are the contacts at the Rating Agencies? • Fitch: Dan Champeau One State Street Plaza New York, NY 10004Tel: (212) 908-9188E-mail:dan.champeau@fitchratings.com
How Do I Get a Bond Rating? Who contacts the Rating Agencies? • Your Financial Advisor • Your Bond Counsel
How Do I Get a Bond Rating? How much lead time do the Rating Agencies need? • S&P: 3 weeks prior to bond sale. • Moody’s: 2 weeks prior to bond sale.
How Do I Get a Bond Rating? How much will it cost to get a rating? • S&P:
How Do I Get a Bond Rating? How much will it cost to get a rating? • Moody’s:
How Do I Get a Bond Rating? Who pays for the bond rating? • Issuer How and when is the bond rating paid? • Cost of issuance • Out of bond proceeds
The Ratings Process Step 1: Develop the Plan of Finance • Discussions with: • Financial Advisor • Bond Counsel • Underwriter • Underwriter’s Counsel • Bond Insurer
The Ratings Process Step 2: Prepare Preliminary Official Statement • Drafted by: • Bond Counsel or • Underwriter’s Counsel • Input and review by • Finance Director • Financial Advisor • Others
The Ratings Process Step 3: Submit Information to Rating Agencies • Preliminary Official Statement • Notice of Sale (if competitive) • Legal opinion • Annual Reports or Audits for past 3 years • Most Recent Operating Budget • Other materials, depending on the type of bond and security therefor
The Ratings Process Requested Information Includes: • 10 Year Assessed Value • 10 Largest Taxpayers • Population trends • Tax Collection Procedures • Debt Limits • Future Debt Plans • Number of Building Permits • Unemployment Rates • Leading Employers
The Ratings Process Step 4: Interaction with Ratings Agencies • Telephone conference • Pros • Less time and expense • Advances in technology (web conferencing) • Refundings – good candidate • Cons • Less formal • More difficult to “show off” recent project successes
The Ratings Process Step 4: Interaction with Ratings Agencies • Visit from the Ratings Agencies • Pros • Relatively inexpensive for issuer • Issuer able to showcase recent “success stories” • Need to see the particular project • Not another stack of paper on the desk • Show them the unique things about your community
The Ratings Process Step 4: Interaction with Ratings Agencies • Visit from the Ratings Agencies • Cons • they will see it all • “Hide it out in the open” – don’t try to hide it. • Uninvited guests.
The Ratings Process Step 4: Interaction with Ratings Agencies • In-person meeting at the Ratings Agencies (“do I get to go to New York?”) • More expensive than other options • Control the message • Control who interacts with analysts • Let them see your impressive management team • Not another stack of paper on the desk
The Ratings Process Step 4: Interaction with Ratings Agencies • Follow up information or calls • Address “deflected” questions • Provide additional or updated data • Correct any mistakes
The Ratings Process Step 5: Issuance of the rating • Credit Analyst will take the information, analyze it and present it to Rating Agency’s credit committee for a vote on the rating
The Ratings Process Step 5: Issuance of the rating • How Long Does it Take for the Rating to be Generated after Interaction?
The Ratings Process Step 5: Issuance of the Rating • What Type of Report is Generated? • S&P: Letter + Rationale • Moody’s: Letter + Memo • Fitch: Letter + Discussion
The Ratings Process Step 5: Issuance of the Rating • Opportunity to Review and Comment to the Ratings • “Oh…no…no, I strenuously object!” • Reconsideration - rare - usually only if there is material new info • Be careful. Don’t say “you’re wrong”. You’ll have to work with these folks again
The Ratings Process Step 6: Dissemination of the Rating • After opportunity for issuer to review rating, it is disseminated through print and electronic media and in response to verbal requests to the Rating Agencies’ desks. • Issuer can spread the word, too. • Rating Agencies - Protected by 1st Amendment freedom of press.
Keeping/Maintaining a Rating • What Rating Agencies Like and Don’t Like Moody’s – Methodology re: GO Bonds Issued by U.S. Local Governments (October 2009) S&P - Public Finance Criteria: Financial Management Assessment (June 2006); updated by Request for Comment: Methodology for U.S. State Ratings (May 2010)
Keeping/Maintaining a Rating Overview of Moody’s Local Government General Obligation Ratings • 8,200 local governments • Investment grade only • GO backed by strongest credit (Full Faith and Credit; established by law – unconditional pledge and Constitutional debt limits)
Keeping/Maintaining a Rating Moody’s: Four key factors and 16 sub-factors: • ECONOMIC STRENGTH (40%) • FINANCIAL STRENGTH (30%) • MANAGEMENT AND GOVERNANCE (20%) • DEBT PROFILE (10%)
Keeping/Maintaining a Rating • ECONOMIC STRENGTH (40%) a. Size and growth trend b. Type of economy c. Socioeconomic and demographic profile d. Workforce profile
Keeping/Maintaining a Rating • FINANCIAL STRENGTH (30%) a. Balance sheet/liquidity b. Operating flexibility c. Budgetary performance
Keeping/Maintaining a Rating • MANAGEMENT AND GOVERNANCE (20%) a. Financial planning and budgeting b. Debt management and capital planning c. Management of economy/tax base d. Governing structure e. Disclosure
Keeping/Maintaining a Rating • DEBT PROFILE (10%) a. Debt burden b. Debt structure and composition c. Debt management and financial impact/flexibility d. Other long-term commitments and liabilities
Keeping/Maintaining a Rating S&P Factors • Rating = opinion on an issuer’s capacity and willingness to pay its financial obligations on a timely basis. • S&P Factors – depend on the type of issue. • www.standardandpoors.com table of contents
Keeping/Maintaining a Bond Rating S&P Factors General Obligation Bonds • Economy • Financial Performance and Flexibility • Debt Burden • Management
Keeping/Maintaining a Bond Rating Economy • Employment base (concentration and volatility) • Tax base and concentration (concentration and volatility) • Growth prospects • Geography and proximity to transportation hubs • Affordability • Range of services provided • Quality of infrastructure • Population (age, education, skills, income, wealth)