Credit Rating

A credit rating is an independent assessment of the creditworthiness of a bond (note or any security of indebtedness) by a credit rating agency. It measures the probability of the timely repayment of principal and interest of a bond. Generally, a higher credit rating would lead to a more favorable effect on the marketability of a bond. The credit rating symbols (long-term) are generally assigned with "triple A" as the highest and "triple B" (or Baa) as the lowest investment grade (See below for definition of rating grades). Anything below triple B is commonly known as a "junk bond." (See the rating agency sites for specific definitions.)

Rating Agencies

Rating Process

The rating process begins with an application to the rating agencies by the issuer or its agent either via a telephone call or in writing.

The rating request is usually done several weeks before the issuance of the bonds to allow time for the rating agencies to perform their review and analysis. Generally, the following draft documents should be provided to the rating agencies as soon as possible:

  • preliminary official statement
  • audited and unaudited financial statements
  • current budget information, including economic assumptions and trends
  • capital outlay plans
  • bond counsel opinion addressing the authority and tax-exempt status of the bond issuance
  • legal documents relating to the security for the bonds
  • documents that may pertain to the bond issuance as requested by the rating agencies.

Following this, a meeting is set up at the rating agency's or issuer's office to present the credit worthiness. The credit analyst prepares a municipal credit report which discusses key analytical factors. The credit analyst presents credit for "sign-off" with the senior analyst and makes a recommendation for rating. The credit analyst makes a presentation before a rating committee comprised of senior analysts. Finally, the rating is released to the issuer, then to a wire service, followed by a publication of full credit report.

Factors Effecting Credit Rating

Economic Factors

  • Evaluation of historical and current economic factors
  • Economic diversity
  • Response to business cycles
  • Economic restructuring
  • Assessing the quality of life in the given area

Debt/Issue Structure

  • Economic feasibility and need for project
  • Length of bond's maturity, short-term debt financing
  • Pledged security and other bondholder protections
  • Future outlook: capital improvement plan

Financial Factors

  • Sufficient resources accumulated to meet unforeseen contingencies and liquidity requirements
  • On-going operations are financed with recurring revenues
  • Prudent investing of cash balances
  • Ability to meet expenditures within economic base

Management/Structural Factors

  • Organization of agency and management
  • Taxes and tax limits
  • Clear delineation of financial and budgetary responsibilities

Contact Bond Finance

Location:
Austin Building, 1st Floor
(formerly Treasury Building)
430 W. Allegan
Lansing, MI 48922

Mail:
P.O. Box 15128
Lansing, MI 48901

Phone: 517-335-0994
Fax: 517-241-9509