Municipal Bonds: The Role of Rating Agencies

Summary

This practice note provides an overview of the role of rating agencies in bond issuances. An essential aspect of bond sales is the assignment to a bond issuer of a favored bond rating by one of the several recognized rating agencies: Moody's Investors Service (Moody's), Standard & Poor's (S&P), or Fitch Ratings (Fitch). A favorable rating usually encourages investors to purchase the public offering, it enhances the credibility of the issuer, and it directly affects the prices the bonds will sell for. Only modest differences in bond ratings may have a significant impact on the amount of interest that issuers will be required to pay to bondholders. An agency's rating may also have a significant impact on a community's ability to obtain insurance for its bond instruments. However, in some cases (usually in situations where a proposed bond issue is of a relatively small denomination or where the issuer is willing to pay a higher interest rate) a bond may be unrated.