The Bond Buyer last week ran a very interesting series of stories reflecting on the events and market changes that have occurred over the past ten years since the global financial crisis. Each story in the series reflected on a different issue or topic, and I highly recommend market participants find the time to read them.
One, in particular, is critical for issuers to digest: Robert Slavin’s article of the changing role of the rating agencies. This is a must-read in #muniland and you can click here for the article.
Slavin notes that most bonds issued in the municipal bond market continue to be rated, with S&P and Moody’s assigning about 92% of them. That’s not a big surprise, as I think ratings – like online product reviews – are never going away. A third-party opinion of a security is still a valuable part of any investor’s evaluation process. Fitch and Kroll also continue to provide ratings to a larger and larger share of the market.
The key take-away, however, is the role ratings now play in the evaluation process. Again, quoting from the article:
“The rating agencies are better than they were before the financial crisis,” said Marylin Cohen, president of Envision Capital Management. “But we use the ratings as suggestions and not the Holy Grail.”
Suggestions and not the Holy Grail. This is the same perspective we hear every day in our discussions with institutional investors of all sizes.
At the Association of Public Treasurer’s conference held in Memphis in July 2018, I was joined on a panel by Vanguard’s Akiko Mitsui. We discussed what investors need and prefer from issuers prior to a bond sale. She stressed that more investors than ever before undertake their own credit analysis of bonds. As such, issuers would benefit if they shared more current information with investors sooner in the pre-bond sale process.
From experience, I know that most issuers leading up to a bond sale spend nearly all of their time and effort focused on the rating agencies. They spend little to no attention focused on bond investors, even though investors – and not rating agencies – are the ones who will actually purchase bonds and lend them the necessary capital to finance their infrastructure. That is a big miscalculation, and Slavin’s article illustrates this market perspective is ten years out of date. For all muni issuers reading this, what’s your plan to reach more investors directly?