Municipal securities issuers may be buoyed by widespread credit rating recalibrations, which enhance the comparison of municipal securities to securities in other sectors. However, they also should consider whether a rating change creates an obligation on the part of the issuer to file a material event notice pursuant to continuing disclosure undertakings.
Because these credit rating recalibrations affect more than 90 percent of all rated governmental purpose bonds, nearly every issuer may be affected.
Both Moody’s and Fitch Announce Recalibrations to Global Scale
Just as a rising tide lifts all boats, recalibrations to a global scale by two of the three municipal securities credit rating agencies will broadly lift credit ratings in the affected sectors.
On March 17, 2010, Moody’s Investors Service, Inc. issued a press release saying that it would move to a global scale for its long-term U.S. municipal securities ratings. Moody’s cautioned that the recalibration will not represent a change in its opinion of the credit quality of affected issuers but was intended to provide greater comparability between ratings of these obligations and those issued by other entities such as corporations. State ratings were recalibrated on April 17, 2010, and sector-by-sector local government recalibrations are expected to occur through May 10, 2010.
The adjustments, which could be as much as two or even three notches, primarily affect state and local government ratings for tax-supported obligations and water/sewer, electric power (distribution only), special tax, and public higher education obligations. Moody’s said its recalibration will affect nearly 18,000 issuers and approximately 70,000 ratings.
On March 25, 2010, Fitch Ratings announced that it was proceeding with the recalibration of certain U.S. public finance sector credit ratings. State ratings were recalibrated on April 5, 2010. The remaining tax-supported ratings and the water/sewer, public power (distribution only), and public higher education ratings will be recalibrated on April 30, 2010. Fitch’s announcement stated that the intent of the recalibration is to ensure a greater degree of comparability across its global portfolio of credit ratings and that the recalibration should not be interpreted as an improvement in the credit quality of those securities. The adjustments affect bonds with prior ratings from BBB- to AA+ and thereby encompass more than 90 percent of the ratings in the affected sectors.
The third credit rating agency, Standard & Poor’s Ratings Services, is unlikely to announce a recalibration, as it has previously stated that its ratings are uniform across credit sectors.
The credit rating recalibrations will not affect many categories of revenue bonds such as housing, private higher education, health care, and industrial development bonds.
Rating Change Is a Listed Event
A municipal securities issuer can determine what action it is required to take only by reviewing the issuer’s specific continuing disclosure undertakings.
By way of background, the continuing disclosure rules of the SEC do not apply directly to a municipal securities issuer. The SEC’s Rule 15c2-12 provides, with certain exceptions, that a participating underwriter shall not purchase or sell municipal securities in connection with a primary offering unless the underwriter reasonably determines that the issuer or an obligated person has entered into a continuing disclosure undertaking that meets the requirements of the rule. Among other things, the undertaking must provide that notice will be given in a timely manner upon the occurrence of any of multiple listed events, if material. Rating changes are specifically described among the listed events.
A municipal securities issuer would need to determine whether a rating change resulting from a recalibration is material. In general, information is material if there is a substantial likelihood that a reasonable investor would consider it important in making an investment decision. In July 2009, the SEC proposed amendments to Rule 15c2-12 that would modify the material event language so the “if material” condition would not apply to rating changes, suggesting the SEC’s likely position is that any rating change is material.
The SEC also has taken the position that the obligation to give a material event notice exists even if the municipal securities issuer does not have knowledge of the event. Because the credit rating agencies typically give direct notice to a municipal securities issuer only in connection with a new issuance of securities, the municipal securities issuer will most likely obtain direct knowledge of a rating change resulting from a recalibration only by checking with the credit rating agency.
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If you have any questions about this alert or would like to discuss the topic further, please contact your Foley attorney or any of the following individuals:
Laura L. Bilas
Chauncey W. Lever, Jr.