Moody's caves on muni bond ratings

Speaking in front of the US House Financial Services Committee yesterday, Laura Levenstein, a Moody's senior managing director in the public, project and infrastructure finance group, said: "We have recently decided to assign global ratings to municipal issuers upon request."

Historically, municipal bonds have been much less risky than corporate bonds, but muni investors have also been far more risk-averse, needing finer-grained ratings at the top end of the scale to discern the differing risks of financial stress as well as actual default, which could affect the value of their muni portfolios.

"If municipal bonds were rated using our global ratings system, the great majority of our ratings likely would fall between just two rating categories: Aaa and Aa," Levenstein said.

But, she added, muni bonds were no longer a separate market - investors in corporate debt were increasingly interested in muni debt as well.

The committee chairman, Barney Frank, criticised the agencies for holding municipal debt to a higher standard, saying it was costing local governments billions in higher coupon costs or monoline insurance payments.

However, the move would further undermine troubled monoline insurers, which have had a steady business providing AAA wrappers for muni debt - in contrast to their catastrophically failed excursion into wrapping structured finance. With the municipal market gone as most muni issuers are upgraded to AAA, the insurers would be left without a reliable revenue stream.

In retrospect, the move also justifies investor Warren Buffett's decision to withdraw his proposed muni monoline provider. Buffett offered to assume $800 billion in muni liabilities from the monolines in February, but withdrew the offer on March 3 after it was rejected by the monolines.

See also: Going the wrong way 
Crisis point 
MBIA looks to past head as monolines flounder
 Monolines show no appetite for Buffett