Muni Bond Ratings Guide for Investors

Understanding muni bond ratings is crucial for investors who want to make informed decisions about their municipal bond investments.

The three main rating agencies for muni bonds are Moody's, S&P Global, and Fitch Ratings, which assign ratings from AAA (highest) to D (lowest).

Investors should be aware that the rating agencies use different criteria and methodologies, which can result in varying ratings for the same bond.

Muni bonds rated AAA are considered to be the lowest risk, while those rated below BBB are considered to be higher risk.

Expand your knowledge: Junk Bonds Usually Have Low Ratings Because

Municipal bonds have their own unique rating system, which can be a bit confusing at first. But don't worry, it's actually quite straightforward once you understand the basics.

The three major rating agencies - Moody's, S&P, and Fitch - use similar tiers to rate municipal bonds. You can find these tiers in the table below.

Notice that the top tier, Aaa1, is the same for all three agencies. This means that if a municipal bond has an Aaa1 rating from Moody's, it's also considered AAA+ by S&P and Fitch.

Municipal bonds with lower ratings are considered riskier, but they can also offer higher yields. If you're considering investing in municipal bonds, it's essential to understand the rating system and do your own research to make informed decisions.

The rating agencies have their own reasons for assigning preliminary ratings, which can be marked with a "p" or "pr". This means that the final rating may differ from the preliminary one.

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Credit rating agencies play a crucial role in determining the creditworthiness of municipal bonds. These agencies, such as Moody's, Standard & Poor's, and Fitch, assign a credit rating to a bond based on the issuer's financial condition, debt levels, and management practices.

There are three major credit rating agencies: Moody's, Standard & Poor's, and Fitch, which control approximately 95% of the ratings business. These agencies are registered as nationally recognized statistical rating organizations (NRSROs) with the SEC.

The most well-known credit rating codes are AAA, AA, A, BBB, BB, B, CCC, CC, C, and D, with AAA being the highest rating and D indicating default. Moody's, Standard & Poor's, and Fitch assign bond credit ratings using these codes, with Moody's also using WR and NR for 'withdrawn' and 'not rated' respectively.

Here is a summary of the credit rating codes and their equivalent NAIC designations:

The credit rating industry is highly concentrated, with the "Big Three" credit rating agencies – Fitch Ratings, Moody's and Standard & Poor's (S&P) – controlling approximately 95% of the ratings business.

These agencies are registered as nationally recognized statistical rating organizations (NRSROs) with the SEC, a designation that requires them to adhere to specific guidelines.

A.M. Best Company, Inc. and DBRS Ltd. are two other notable NRSROs that are registered with the SEC.

Fitch, Inc. and Moody's Investors Service, Inc. are also registered as NRSROs, with Fitch focusing on ratings for financial institutions and Moody's covering a broader range of industries.

Broaden your view: Corporate Bonds Ratings

The Credit Rating Agency Reform Act allows NRSROs to register for up to five classes of credit ratings, including financial institutions and government securities.

In Asia, credit rating agencies like China Chengxin International (CCXI) and Rating and Investment Information (R&I) are recognized in their domestic markets, with CCXI operating in China and R&I in Japan.

Credit Rating Codes are assigned by credit rating agencies like Moody's, Standard & Poor's, and Fitch to express their assessment of the risk quality of a bond. These codes are a financial indicator to potential investors of debt securities.

The most widely recognized credit rating codes are AAA, AA, A, BBB, BB, B, CCC, CC, C, and D. Moody's assigns bond credit ratings of Aaa, Aa, A, Baa, Ba, B, Caa, Ca, C, as well as WR and NR for 'withdrawn' and 'not rated' respectively.

Here's a breakdown of the credit rating codes from Moody's, S&P, and Fitch:

In addition to the rating codes, agencies typically supplement the current assessment with indications of the chances for future upgrades or downgrades over the medium term. For example, Moody's designates an Outlook for a given rating as Positive (likely to upgrade), Negative (likely to downgrade), Stable (likely to remain unchanged), or Developing (contingent on some future event).

Municipal bond ratings are assigned by credit rating agencies like Moody's, Standard & Poor's, and Fitch, and are expressed as code designations such as AAA, B, CC, or WR and NR for 'withdrawn' and 'not rated' respectively.

These codes are grouped into broader classes described as "investment grade" or not, or in numbered tiers from high to low. For example, Moody's assigns bond credit ratings of Aaa, Aa, A, Baa, Ba, B, Caa, Ca, C, as well as WR and NR.

Here's a breakdown of the rating tiers and definitions:

Currently, there are only two companies in the United States with an AAA credit rating: Microsoft and Johnson & Johnson.

Rating Tier Definitions are used by credit rating agencies like Moody's, S&P, and Fitch to evaluate an obligor's capacity to meet its financial commitments.

The highest rating tier is Aaa, which indicates an extremely strong capacity to meet financial commitments. This tier is further divided into three sub-tiers: Aaa1, Aaa2, and Aaa3.

An obligor with a rating in the Aa tier has a very strong capacity to meet its financial commitments, but with some limitations compared to the highest-rated obligors.

Here's a breakdown of the rating tiers:

Note that the credit worthiness descriptions are provided by the credit rating agencies, and may vary depending on the specific obligor and circumstances.

Investment-grade bonds are considered safe and reliable, but they still come with some level of risk. They are judged by rating agencies as likely to meet payment obligations, making them a good choice for banks to invest in.

These bonds are rated BBB- or higher by Fitch Ratings or S&P, or Baa3 or higher by Moody's, the "Big Three" credit rating agencies. This means they are considered a relatively low-risk investment.

The difference between investment-grade bonds and first-class government bonds is significant, with investment-grade bonds offering a higher yield but also a higher risk. This is known as the investment-grade spread, and it's an indicator of the market's belief in the stability of the economy.

Additional reading: Are Muni Bonds a Good Investment

Investment-grade bonds are often considered a stepping stone between government bonds and high-yield bonds, also known as junk bonds. They offer a higher yield than government bonds but still come with some level of risk.

Risks associated with investment-grade bonds are considered significantly higher than those associated with first-class government bonds. This means that while they are still a relatively safe investment, they are not as risk-free as government bonds.

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Municipal bonds are generally safer than corporate bonds, with lower risk of default and higher recovery rates. This is because municipal bonds are backed by the creditworthiness of a local government or other public entity.

The credit rating agencies, such as Moody's, Standard & Poor's, and Fitch, assign credit ratings to bonds to indicate their risk quality. These ratings are grouped into classes, with investment-grade bonds being the safest and speculative bonds being the riskiest.

Moody's assigns bond credit ratings from Aaa to C, while Standard & Poor's and Fitch assign ratings from AAA to D. Currently, only two companies in the US have an AAA credit rating: Microsoft and Johnson & Johnson.

Here's a comparison of the credit rating codes and classes from Moody's, Standard & Poor's, and Fitch:

The credit rating agencies also provide indications of the chances for future upgrades or downgrades over the medium term, such as Moody's Outlook of Positive (POS), Negative (NEG), Stable (STA), or Developing (DEV).

Municipal bond rating defaults have been much less common compared to corporate bonds.

Historically, recoveries in the event of default have been much more successful for municipal bonds.

As interest rates rise, it's safer to consider short-term muni bonds, which have a lower risk profile.

Performance Measurement is a crucial aspect of municipal bonds.

The City's credit rating is determined by three major municipal bond rating agencies: Moody's, Standard & Poor's, and Fitch.

Each rating agency has its own proprietary methodology for assigning ratings to a municipality.

A high credit rating allows the City to issue debt at lower borrowing costs.

Moody's “Aaa” classification is the highest rating in its system, indicating that the City presents minimal credit risk.

Standard & Poor's also uses a high rating, "AAA", which is the highest in its system.

The City's GO bond rating, also known as its credit rating, measures the overall financial stability of the City.

Municipal bonds are instruments issued by local, state, or federal governments in the United States.

The risk associated with corporate grade bonds is considerably higher than that of first class municipal bonds, as proven by Moody's municipal bond ratings scale.

Municipal bond rating defaults have been much less common compared to corporate bonds, and recoveries in the event of default have been much more successful.

Investors have always relied on ratings agencies to steer them through the municipal bond market, but it's essential to personally perform research on municipal bonds to make informed decisions.

BondView's bond pricing check and municipal bond portfolio tools can make the investment process easier, and their individual ratings for liquidity, volatility, and more can provide valuable insights with the BondView Summary Rating system.

Until April-May 2010, Moody's and Fitch were rating municipal bonds on a separate naming/classification system that mirrored the tiers for corporate bonds, but S&P abolished its dual rating system in 2000.

Reviewing the quantitative and qualitative factors that rating agencies use is a great starting point. These factors are published and circulated by the rating agencies, so it's not a secret.

A full assessment of your strengths and weaknesses based on these metrics is essential. This will help you identify areas that need improvement.

Building flexibility into your budget is crucial. A structurally balanced budget requires an ongoing plan to regenerate fund balances and enhance new revenues.

Measuring and monitoring your financial position on a monthly basis is vital. Track your revenue and expenses to ensure they're in line with your budget and expectations.

Don't wait until you need to borrow to prepare. Building trust and improving your approach to management can have a favorable impact on ratings throughout the year.

Building a relationship with your rating agency is key. Knowing your analyst and keeping them informed of your progress can make a big difference.

Credit rating agencies like Moody's, Standard & Poor's, and Fitch assign credit ratings to municipal bonds, also known as muni bonds. These ratings indicate the creditworthiness of the issuer, which is the city or state that issued the bond.

The credit rating codes range from Aaa (Moody's) or AAA (S&P and Fitch) to C (Moody's), C (S&P), or D (Fitch), with Aaa and AAA indicating the highest creditworthiness and C and D indicating the lowest.

There are three main rating agencies, and they all use similar rating codes, but with some differences. Here's a breakdown of the rating codes used by each agency:

These rating codes are grouped into broader classes, such as "investment grade" or "non-investment grade". The rating agencies also provide additional information, such as the chances of future upgrades or downgrades, which is indicated by an Outlook designation, such as Positive (POS), Negative (NEG), Stable (STA), or Developing (DEV).