Crisis may change tax-exempt bond rating system

Wed, 09 Apr 2008 06:59:58 -0400

With public-finance markets in turmoil, and auction-rate bond interest rates spiking to unheard-of levels, officials are starting to pay attention to the way agencies evaluate bonds. Traditionally, there's been a big gulf between the tax-exempt, municipal bond market accessed by not-for-profit hospitals and the corporate bond market tapped by for-profits. The two have been rated and managed separately for a very long time. Now, some officials are suggesting that there should be a single global rating system that would spontaneously improve the ratings of most municipal bond insurers.

Generally speaking, it has been easier to get a high rating in the corporate bond market than it is in municipal bonds. To make things work on their side, not-for-profit issuers have been using bond insurers to get the AA rating they needed to attract investors. For a long time, that was OK, but when the subprime mess turned many financial markets upside down (when the bond insurers themselves started to go south), it wasn't any more. Through no fault of their own, hospital bond issue rates skyrocketed as bond insurers' own ratings fell. This led to calls for a new ratings system.

Now, the three major ratings agencies have begun to mull such changes. Moody's for example, plans to begin issuing globally-scaled ratings for tax-exempt bonds on an issuer's request. Fitch Ratings and Standard & Poor's, meanwhile, are hanging back a bit and considering their options. However, they're likely to face continuing pressure to make more adjustments, as the tax-exempt muni bond market is far from healed.

To learn more about this issue:
- read this Modern Healthcare piece (sub. req.)

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