1. Don't know how (or why) agencies issue ratings? Start here.
(Shutterstock)
This explainer breaks down the role a government's credit rating plays in its everyday finances. Much like personal credit scores, the interest rate local and state governments pay when they borrow money is tied to their credit worthiness. The rating tells investors about the likelihood of getting their money back -- with interest -- on that government's bond. The higher the rating, the less risky the investment. And vice versa. Read more.
2. Some believe Standard & Poor's is being too generous with its ratings for governments.
In July, a Janney Montgomery Scott issued a report questioning the rating upgrades issued by S&P to many local governments, saying he was "skeptical" of the agency's scoring. He noted such practices could encourage ratings shopping by issuers. Read more.
3. The ratings issued by agencies are diverging in some cases.
Standard & Poor's is mostly upgrading and Moody's and Fitch are mostly downgrading as a result of agencies revamping their criteria in the wake of the financial crisis. The agencies are not necessarily supposed to align – they have different methodologies for rating debt, and they cover different types of issuers. Still, the conflicting tones are a good reminder for investors (and issuers) that a credit rating these days is all about context. Read more.4. Credit agencies pay attention to how governments treat bondholders.
(AP/Brennan Linsley)
But the reverse isn't always true, apparently. Although the creditor group stands to be among the biggest losers in the latest wave of municipal bankruptcies, the trend surprisingly may not sour future investors. Bondholders could recover as little as 50 cents on the dollar in bankruptcy trials in Detroit; Jefferson County, Ala.; Stockton, Calif. and Harrisburg, Penn., according to research by Moody's Investor Services. The recovery is far below the average of nearly 80 cents on the dollar for defaulted municipal bonds since 1970. Even so, restructuring plans for Detroit, Jefferson County and Harrisburg all depend on the municipalities' ability to continue to borrow as they call for new financings to partially repay existing bondholders. Read more.
