Three Ways to Improve Your Bond Credit Rating

by Matthew D. Jessup on August 8, 2011

In today’s municipal bond market, your credit rating is more important than ever. Underwriters and financial advisors say that the difference between an “A” rating and a “AA” rating can mean the difference of 30 basis points or more. Such a difference can result in interest rate savings of $315,000 on a $10,000,000 20-year general improvement bond issue. In refunding transactions, 30 basis points can mean the difference between achieving the State-required 3.00% present value savings (and capturing debt service savings) and falling short (and letting bondholders keep your money).

That said, not every municipality is blessed with a healthy general fund balance, a wealthy tax base and a full “cap bank” under the 2% Property Tax Cap Act. After recently meeting with one rating agency and participating in ratings calls with both ratings agencies week after week, it occurred to me that there are three easy ways every municipality can immediately improve its standing with the rating agencies.

First, establish written policies regarding (1) use and regeneration of General Fund balance, (2) long-term capital improvements and (3) issuance of short- and long-term debt. Your municipality likely already has “informal” or “understood” policies regarding these topics, but they’re not written down. Simply putting them to paper (and, even better, having them adopted by the governing body by resolution) shows the rating agencies that all members of the administration are in agreement and that the policies will survive departing finance officers and administrators and provide continuity.

Second, complete and update revenue and expenditure forecasting on a monthly or quarterly basis. Continuous updates to a 12- or 18-month projection will better prepare a municipality to anticipate and react to future revenue decreases or expenditure increases. Revisit prior forecasts and identify and use historic trends to help prepare future forecasts. Preparing and updating these forecasts, being prepared to discuss each item and meeting the projections consistently are all indications to the rating agencies of a strong management team.

Third, provide monthly or quarterly financial reports to the Mayor and governing body. Use the revenue and expenditure forecast discussed above to prepare a “projected versus actual.” Many municipalities already prepare similar reports but fail to share them with the Mayor and governing body. Keeping everyone informed is another characteristic of a strong management team.

Your municipality likely implements one or more of these three suggestions in an informal way. It is a short step-up to make them formal in a way that satisfies the rating agencies. The effort will be minimal and the result could be significant.

Both Moody’s Investors Service and Standard & Poor’s publish their rating methodologies. I encourage everyone to read through them for more details on what the rating agencies are looking for when assigning a rating to your municipality.

Moody’s – General Obligation Bonds Methodology

Standard & Poor’s – General Obligation Bonds Methodology

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