The Business of Bond Ratings: Part One

The Business of Bond Ratings: Part One
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(Note: This is the first of a four (4) part series on Municipal Bond Ratings.)

When it comes to understanding bond ratings, many people find they don’t know where to begin. What is a bond rating? How does the rating process work? What does a rating mean for your community? What happens after the bonds are sold?

What Is A Bond Rating?

A bond rating is an assessment of your community, its financial position and its ability to pay timely and in full the obligation (debt) which is either about to be issued or is presently outstanding.  That assessment, often expressed in terms of a “letter grade” is used by investors, as part of their due-diligence, in determining the level of risk associated with their potential investment.

The higher the rating, the lower the risk. Meaning that the less likely that the issuer will be unable to make full and timely payment on their obligation(s). The lower the investor’s risk, the more attractive the investment is which could lead to increased demand and an overall lower interest cost to the issuer.

The ratings are provided by rating agencies, independent third party organizations. Standard and Poor’s Ratings Group, Moody’s Investors Service and Fitch Ratings Group are the three primary organizations that rate US municipal bond issuers .

The ratings process considers a vast array of topics, including but not limited to:

  • The debt:
    • The legal authority for its issuance
    • The purpose for which it is being issued
    • The structure of the debt
    • The security pledged to the debt’s repayment
  • The issuer:
    • The legal structure of the issuer
    • Existing and proposed/contemplated future debt
    • Past payment history
    • Financial trends and tendencies
    • Management’s fiscal policies and oversight
    • Past financial performance
    • Current financial projections
    • Economic history and forecasts

Ratings are based on the facts and circumstances at the time they are given and are subject to reviews that will occur over the life of the debt. Changes in circumstances will most likely have an impact on the rating (in either a positive or negative way).

LWG can assist you with your rating questions and needs, please feel to reach out to a member of our team if you should have any questions or need additional information.

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