Bond Ratings 101 Cora Bruemmer Associate Director U.S. Public Finance State & Local Government Minnesota Government Finance Officers Association Arrowwood Resort Alexandria, Minnesota September 28, 2017 Copyright 2016 by S&P Global. All rights reserved.
Topics To Cover Today Intro to credit ratings and rating definitions S&P Global s local government general obligation (GO) criteria What happens during a rating agency call or meeting What happens on a site visit The committee process and releasing a rating Surveillance Private & Confidential 2
Intro to Credit Ratings: What Credit Ratings Are and Are Not Credit ratings are: Opinions about relative credit risk Opinions of the bond issuer s willingness and ability to meet its financial obligations, in full and on time, in accordance with the bond documents Intended to be a forward looking opinion Credit ratings are not: Investment advice Buy, hold, or sell recommendations Guarantees of credit quality or of future credit risk An indication of absolute default probability Private & Confidential 3
Intro to Credit Ratings: S&P s Global Ratings Scale We strive to be globally comparable across sectors, and our rating scale helps rank relative creditworthiness Private & Confidential 4
S&P Global s Local Government GO Criteria Private & Confidential 5
Economy (30%) Projected per capita effective buying income (EBI) as a % of U.S. Total market value per capita Qualitative factors: Metropolitan Statistical Area MSA Unemployment rate Employment concentration and/or taxpayer concentration Stabilizing institutions Age dependency or population decline Private & Confidential 6
Finances (30%) Budgetary Performance (10%) Budgetary Flexibility (10%) Liquidity (10%) Private & Confidential 7
Finances (30%) Qualitative Factors Projections suggest a worse/better score Maintenance of available fund balance greater than 30% Cash accounting Questionable receivables Transfers Access to external liquidity Aggressive use of investments Exposure to non-remote contingent liability risk that could come due within 12 months Private & Confidential 8
Management (20%) Mostly based on S&P s Financial Management Assessment (FMA) Private & Confidential 9
Management (20%) The Financial Management Assessment (FMA): An analytical methodology that evaluates established and ongoing management practices and policies in the seven areas we see as most likely to affect credit quality. 1.Revenue and expenditure assumptions 2.Budget amendments and updates 3.Long term financial planning 4.Long term capital planning 5.Investment management policies 6.Debt management policies 7.Reserve and liquidity policies Strong Good Standard Vulnerable Currently applicable only to general government tax- and appropriation-backed issues, excluding special districts. Private & Confidential 10
Debt & Contingent Liabilities (10%) Total Governmental Funds debt service as a % of TGF expenditures Net direct debt as % of TGF revenue Qualitative factors Very low (<3%) or very high (>10%) overall net debt as % of market value Rapid amortization Significant medium term debt plans Exposure to interest rate risk or other instrument provisions Speculative contingent liabilities Exposure to large unfunded pension/opeb obligations (with and without a plan to address) Private & Confidential 11
Institutional Framework (10%) Assesses the legal and practical environment in which the local government operates All governments of the same type within the same state receive the same score 1. Predictability 2. Revenue/Expenditure Balance 3. Transparency and Accountability 4. System Support Very Strong Strong Adequate Weak Very Weak MN cities with population between 1,000 and 2,500 score Adequate All other MN cities score Strong Private & Confidential 12
Overriding Factors Positive Overriding Factors High income levels (>225% or >300%) Sustained high fund balances (>75% of general fund expenditures) Negative Overriding Factors Low market value per capita (<$30,000) Low nominal fund balance (<$500,000) Weak liquidity (caps at BBB+ or BB+) Weak management (caps at A or BBB-) Lack of willingness to pay obligations (caps at BBB- for leases and B for debt) Large chronic negative fund balances (caps at A+, A-, or BBB) Budgetary flexibility score of 5 (caps at A+) Structural imbalance (caps at BBB+) Potential one-notch adjustment The final rating assigned to the GO issue will be within one notch of the indicative rating, with onenotch differentials determined based on trends and comparisons with similarly rated peers Private & Confidential 13
What Happens During a Rating Agency Meeting The meeting provides valuable forward-looking qualitative information and supplements the quantitative portion of our criteria Meeting participants: Two S&P Analysts, Municipal Advisor, Finance Director May include Administrator; other leadership Duration: one hour or so Location: conference call or in-person meeting Time: at least 4-10 days prior to rating delivery date, depending on schedule Private & Confidential 14
What Happens During a Rating Agency Meeting S&P analyst will typically send a high level agenda or list of questions in advance of the call A formal presentation is not required, but it is welcome Meeting topics: Introductions Purpose and structure of the bond issue (what type of capital project, nature of refunding) Criteria factors (Economy, finances, management, debt) Identify follow-ups for after the call Discuss timing for pre-publication report review and release of rating Tips for the issuer: Have the POS, recent audit, and budget figures in front of you Answer the questions directly Share relevant information even if we don t ask for it, disclosure is important! If you don t know an answer, follow-up after the call It s normal, perfectly acceptable and has no negative credit connotations for answers to be sent after the meeting Private & Confidential 15
What Happens During a Site Visit Site visits may occur in coordination with a new sale or may not If there is a bond sale, the management meeting may be before or after the site visit During the tour of the city, we often see: Recently or to-be financed projects Representative neighborhoods and commercial/industrial areas New economic development Issuers typically ask for site visits when: There has been a notable shift (either positive or negative) in the issuer's credit conditions The issuer has experienced significant economic development There is a complicated aspect of the analytics that would benefit from a face-to-face meeting The issuer believes there is discrepancy between the perceived and actual rating Private & Confidential 16
The Committee Process and Releasing a Rating Private & Confidential 17
Surveillance S&P monitors and surveils rated issuers and issues on an ongoing basis Relevant financial information, such as your audit, is collected annually The unavailability of timely information could affect your credit rating Surveillance occurs at least annually We will review, and update if necessary, credit ratings based on relevant financial information We may request supplemental information and/or a phone call to enhance or clarify information already received. Please respond in a timely manner; the unavailability of timely information could affect your credit rating. A change in the credit rating is accompanied by a rating report Private & Confidential 18
Recent Publications The Top 10 Management Characteristics Of Highly Rated State And Local Borrowers (May 22, 2017) Minnesota Local Governments Hold Steady Despite High Debt And Growing Pension Liabilities (July 18, 2017) Median And Credit Factors: Minnesota (July 18, 2017) What To Expect From The S&P Global U.S. Public Finance Rating Process (Sept. 5, 2017) Private & Confidential 19
Questions? 20
Thank you Cora Bruemmer Associate Director T: 312.233.7099 Cora.Bruemmer@spglobal.com 21
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