Moody’s plans new muni system

Moody’s Investors Service plans to rate municipal debt on the same scale used to grade corporate bonds if such treatment is requested by a government issuer, a Moody’s executive told a House committee Wednesday.

State treasurers and municipal bond issuers have argued that billions of dollars in interest and insurance costs could be saved by city and state governments if bond rating firms used a unified rating system for municipal and corporate debt.

According to Municipal Market Advisors, corporate bonds with AAA ratings, the highest available, have defaulted at 10 times the rate of municipal bonds rated A, a much lower grade.

As a result, many municipalities buy insurance for the bonds that they issue so investors will perceive them as AAA-rated.

But insurers that specialize in guaranteeing repayment of municipal bonds in recent years also began selling insurance on mortgage-backed securities. As defaults on home loans have risen, the bond insurers’ own AAA ratings have been jeopardized.

Some bond insurers have already been downgraded, and others are threatened with downgrades.

The insurers’ problems have undermined confidence in municipal bonds, making it more expensive for state and local governments to borrow money to finance projects such as roads, parks and schools. Some investment funds that are required to hold only top-rated bonds have had to sell securities insured by downgraded companies. That has caused yields on municipal bonds to soar.

Laura Levenstein, a senior managing director in Moody’s global, public, project and infrastructure division, told a House Financial Services Committee hearing that starting in May the firm would use global ratings for any tax-exempt bond issue, including previously issued securities.

When pressed by committee Chairman Barney Frank, a Massachusetts Democrat, on whether Moody’s would rate municipal bonds on the same scale used for corporate bonds, Levenstein said, “We are going to do that at the issuer’s request.”

Levenstein declined to answer a reporter’s questions on the change after the hearing.

The shift by Moody’s won’t come soon enough for some market participants.

“Unfortunately, this decision doesn’t immediately help the money market funds or the hedge funds that are now forced to unload debt,” said Dick Larkin, an analyst at Herbert J. Sims & Co.

California Treasurer Bill Lockyer and Connecticut Atty. Gen. Richard Blumenthal testified at the House hearing in favor of scrapping separate rating systems for municipal bonds.

Ajit Jain, head of the new bond insurance unit at Berkshire Hathaway, told the committee that eliminating separate rating systems for municipal bonds could eliminate the demand for “a financial guaranty insurance marketplace as we know it.”

In an interview, New Jersey Gov. Jon Corzine, a former chief executive at Goldman Sachs Group Inc., on Wednesday called a different rating scale for municipalities “valid” and said bond insurers could provide value as long as they stuck to their original model of insuring only municipal bonds.