Rating Municipal Bonds

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The nation's two oldest bond-rating agencies, Moody's and Standard & Poor's, trace their beginnings to firms that analyzed the finances and public securities of railroad companies. They have long dominated the business of rating corporate and municipal bond issues, but they face increased competition from newer services. Here is a capsule look at the four companies that rate a wide variety of corporate and municipal bonds, including bonds issued by school districts:

Moody's Investors Service

The firm was founded in 1909 by John Moody, a financial analyst and publisher of investment manuals. He developed the series of letter grades to assess the investment quality of various securities. New York City-based Moody's was acquired by the Dun & Bradstreet Corp. in 1962. Today, the firm rates about 56,000 public-finance issues a year. According to The Wall Street Journal, Moody's has revenue of about $350 million a year.

Standard & Poor's Ratings Services

In 1941, Standard Statistics, a company that began issuing bond ratings in 1916, merged with Poor's Publishing to form the Standard & Poor's Corp. The New York City-based company was acquired by the McGraw-Hill Companies Inc. in 1966. It also has annual revenues of about $350 million, according to The Wall Street Journal.

Fitch Investors Service

Fitch was founded in 1922 but remained relatively small until it was acquired by new investors in 1989. The New York City firm has moved aggressively into public-finance ratings and has attracted, in recent years, many school districts that were looking for an alternative to Moody's. The company reported 1995 revenue of $50 million.

Duff & Phelps Credit Rating Co.

Although it is much less of a player in rating municipal bonds, Chicago-based Duff & Phelps rates school district debt and other public-finance issues on request. The company had revenue of $46 million in 1995.

Moody's Standard & Poor's,
Fitch, Duff & Phelps

Investment Grade


Bonds are of the highest quality, with the lowest investment risk.


High quality, but slightly more long-term risk than top-grade bonds.


High-medium quality, but revenue sources may be susceptible to changing economic conditions.


Medium quality, repayment ability currently adequate but may be unreliable over the long term.

Speculative Grade


Lower-medium quality bonds that are currently well-protected but include long-term risk.


Speculative bonds that meet repayment but are at risk of default.


Poor-quality bonds that are at short-term risk of default.


Highly speculative, may already be in default.


Lowest-rated, with poor prospects of gaining any investment standing.

  • D

    Bonds in default.

  • Moody's does not have a grade below C.

    Tax-exempt securities issued by school districts and other governmental agencies, known as municipal bonds, are rated by private, independent credit-rating agencies based on the degree of financial risk associated with the investments. The higher the bond rating, the lower the risk to investors and the lower the interest rate for the bonds. A lower interest rate results in savings to a district's taxpayers. At left is a comparison of the bond-rating grades used by Moody's and those used by Standard & Poor's, Fitch, and Duff & Phelps, as well as a description of what the grades mean. Each company's criteria for assigning a rating vary somewhat. Also, the firms make additional distinctions within categories below Aaa/AAA. Moody's uses numerical ratings (1,2,3), while Standard & Poor's, Fitch, and Duff & Phelps use a plus or minus sign.

    SOURCE: Ratings companies.

Vol. 15, Issue 39

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