Moody's moves U.S. states to new 'global' rating scale

"We have to keep in mind that the migration to the global rating scale, which is artificially elevating ratings and appearance, is occurring against the backdrop of a period of intense fiscal stress that state and local governments are trying to navigate," he said.
Reuters, Monday April 19 2010

WASHINGTON, April 19 (Reuters) - Moody's Investors Services revamped its U.S. state debt ratings on Monday, after state governments pressured it for over two years to make their ratings comparable with other credit sectors.

As a result of Moody's move, some state ratings were lifted by as many as three notches.

California, which had led the charge to create a universal scale, was bumped to A1 from Baa1.

The rating agency previously noted the move to a global scale for munis does not reflect any improvement in credit quality, but represents adjustments to denote a comparable level of credit risk to other types of bonds, such as corporate debt.

Illinois moved to an Aa3, which is the second-highest rating category for investment-grade corporate debt, on Moody's new state scale from A2, or the third-highest rating class, on the old.

Puerto Rico was changed to A3 from Baa3, which is the lowest rung of investment grade on Moody's rating scale.

New York was given an Aa2, compared with its previous Aa3 rating.
SWEET 'TRIPLE-A'

Five states -- Indiana, Iowa, New Mexico, Tennessee, Texas -- moved up to the highest rating of Aaa -- or "triple-A." The U.S. government also has a triple-A rating.

Not all states saw their ratings change. Those that had already attained Aaa ratings remained the same.

Florida, Washington, Kansas and Minnesota also have the same ratings on the new scale, although their outlooks were generally changed to stable from negative.

The new Moody's scale, released on Monday, is only for states' general obligation, or GO, debt. The ratings agency has said it will move about 70,000 municipal ratings altogether to the new global scale.
In the wake of the 2008 credit crunch, members of Congress and high-profile municipal debt issuers called for a unified ratings approach from all Wall Street ratings agencies. They argued that municipal debt was rated lower than similar corporate debt, which has a higher likelihood of default, and cities and states were subsequently forced to pay more in interest.

Two weeks ago, Fitch Ratings recalibrated its U.S. state ratings.
Standard & Poor's Ratings Services has said it uses the same scale across all sectors.

"We've consistently said that the rating system should be recalibrated to reflect the strong history of timely repayment both by New York state and across the municipal sector," said Matt Anderson, spokesman for the New York State Division of budget. "Any movement toward that goal is a positive step."

LONG-TERM EFFECTS UNCERTAIN
Yields could fall on much of the debt with the new scales, according to George Friedlander, senior fixed income strategist at Morgan Stanley Smith Barney, in his latest muni market commentary. But Friedlander warned that "rating deterioration within the now-broader rating bands may become more difficult to spot."

He also said pricing services will struggle with the discontinuity.
Speaking at a conference in Washington D.C. last week, Patrick Brett, director of municipal strategy and global distribution at Citigroup, said international investors will better understand the new ratings and be more willing to buy states' debt.

Joseph Darcy, executive vice president of Hartford Investment Management Company, told the same conference, though, the changes will have a "marginal effect on spreads."

"We have to keep in mind that the migration to the global rating scale, which is artificially elevating ratings and appearance, is occurring against the backdrop of a period of intense fiscal stress that state and local governments are trying to navigate," he said.

(Reporting by Lisa Lambert; Additional reporting by Joan Gralla in New York and Karen Pierog in Chicago; Editing by Jan Paschal)

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