Moody's lays out plans to change muni bond ratings

By Lisa Lambert

WASHINGTON, March 20 (Reuters) - Moody's Investors Services (MCO.N) laid out plans to change how it rates municipal tax-exempt bonds in a request for comment it released Thursday.

Beginning in May, the agency will give global scale ratings, usually reserved for corporations, as well as municipal scale ratings to tax-exempt municipal securities upon issuer request. It will also simplify the conversion table it uses to estimate global ratings for bonds.

"We propose to use the municipal rating scale as the starting point in calculation of the GSR, as it would continue to be the benchmark for comparison of municipal issuers to each other," the document said.

"Moody's databases and reports would display both the municipal and, when assigned, the global rating of an obligation," it said.

The Securities and Exchange Commission requires money market funds to hold "investment-grade" municipal bonds as determined by the ratings agencies, which also include Standard and Poor's and Fitch Ratings. In order to obtain high enough ratings, usually above "AA," issuers "wrapped" their securities with bond insurance. When the insurers were downgraded, funds were disqualified from buying their bonds.

This led issuers, state officials such as California Treasurer Bill Lockyer, and members of the U.S. Congress to call on the raters to change.

"Adoption of this would be a decent first step," said Tom Dresslar, a spokesman from the California Treasurer's Office, about the Moody's proposal. "Our ultimate objective remains the adoption by all rating agencies of a unified approach in rating all municipal bonds."

Generally, even lower-rated bonds have low risk of default. According to Municipal Market Advisors, corporate bonds with "AAA" ratings, the highest available, have defaulted at 10 times the rate of municipal bonds holding a much lower rating of "A."

Moody's gave global scale ratings to taxable municipal securities starting last year, but received "relatively little interest," according to the request for comment. Last March, it decided not to extend the corporate scale to tax-exempt debt, Naomi Richman, chief credit officer, said, because it received comments that having two scales would be problematic.

"The vast consensus was that the municipal scale was well understood," she told Reuters. "I think a lot has changed in the world since that time."

Comments are due April 15, and Richman said the agency has not determined on what date the changes would take effect. Reuters reported the changes were being considered last week.

Dresslar said California would submit comments, and that it does not believe it should have to pay extra to be given a global rating. When Moody's applied the scale to some of California's taxable bonds it added a fee, he said.

In a statement, Sen. Charles Schumer of New York, chairman of the Congressional Joint Economic Committee, said Moody's made an important move to help cities and towns, but more reforms were needed .

"The mortgage crisis has shown there is something very wrong in the way credit rating agencies rate credit," the New York Democrat said, referring to the higher ratings the agencies gave to mortgage-backed securities that later fell apart. "There needs to be a reconsideration of the entire way the agencies do business." (Editing by Leslie Adler)