Q: Disclosure is one of the top issues facing the municipal industry. How important is timely and adequate disclosure by issuers to a rating agency such as Standard & Poor's
A: It's very important. In order for us to maintain our outstanding ratings we require issuers to provide us with ongoing disclosure as to their financial performance and the other operating statistics which can have an impact on their credit quality. If we do not receive this information in a timely manner, then we are not able to maintain our rating on that particular issue. So we'll withdraw our rating.
Q: A CreditWeek Municipal article in April suggested that the Standard & Poor's surveillance group may become a source for secondary market information. Has the agency broached that idea with any group such as the SEC, the Municipal Securities Rulemaking Board, or the Public Securities Association?
A: No. The article in April was primarily to point out that in the secondary market disclosure process the rating agencies, and in particular S&P, serve as an effective mechanism for obtaining secondary market disclosure from the issuers that we rate and we have a vast quantity of data that we feel would be of interest to the marketplace.
Q: Was Standard & Poor's suggesting it could be a conduit for this information?
A: Yes, that's what the article was proposing or suggesting. If there was enough interest from the marketplace, then we would be willing to make this information more readily available to the marketplace on a widespread basis. But it would have to be of economic benefit to us to allow us to do that.
Q: Has anything further happened since April in this area?
A: I guess in terms of the marketplace seeking information from us, not really. In April that was prior to the SEC getting as involved in it as they currently are. That was before they were going to step in and require ongoing disclosure if there was not a concerted effort from the marketplace to come up with an answer for this.
Q: What role does the surveillance group play at Standard & Poor's in terms of secondary market disclosure?
A: We have had a separate surveillance group since 1987. We currently have 19 analysts in the group. What we have don this year is to formalize the process that we've always been working under. That being, trying to review those credits that we deem to be the most vulnerable or most in need of being reviewed. And I should say comprehensively reviewed. We make a distinction between financial reviews and comprehensive reviews.
Financial reviews being when an audit comes in, we take a look at it. We take a look at the questionnaire that accompanies that audit to see if there's been any sort of deterioration that would cause enough concern to warrant a comprehensive review to be porformed on it right away.
A comprehensive review is just that. It's a more in-depth look at what's happening with the credit quality of that particular issue. And then there is a rationale or update we print describing what our analysis has found. And we set up a review frequency schedule which is risk adjusted, again recognizing that not all issues need to be comprehensively reviewed on an annual basis.
So, based on the rating category and based on the security type, we will comprehensively review all ratings on anywhere from a one- to three-year cycle. But I want to emphasize we do perform financial reviews on all of our outstanding ratings on at least an annual basis.
Q: How did the agency come up with the new frequency schedule for review? What was it based on?
A: Again, it's based on the risk associated with a particular issue. The higher the rating, the lower the risk, and then it also encompasses the differing volatilities of the various sectors. Recognizing that the health care sector at this time is a more volatile sector than, let's say, the general obligation sector.
Q: What happens if an issuer is found to have some problems as a result of the review?
A: Let's say that, as a result of doing a financial review, that there's been some deterioration in the financial position or the operations. [The issuer] will be assigned to a surveillance analyst for a comprehensive review to be performed.
Q: What kinds of information does the agency require from issuers it rates?
A: We need to have the latest audited financial statements. Those are the basic documents. We also like to see the current budget. And, as we get into actually performing a review, if there are other questions, other information that we feel we need to have in order to accurately assess the current credit quality of the issue, then we need to have that information in order for us to keep our rating out there.
Q: Do issuers know up front that this kind of information is required of them?
A: Yes, For every issue there is a application for a municipal debt rating. On the back of the application there is a memorandum of agreement where S&P specifies that we need to have ongoing information from the issuer in order for us to maintain our rating.
Q: How do you get issuers to comply with forwarding this information to the agency in a timely matter?
A: We have in addition to the 19 analysts, a staff of three rating statistical assistants, who assist in our information-gathering process. When it's time for the latest financial information to be sent to us and after a certain amount of time has elapsed, if the information has not been sent the [rating statistical assistant] will contact the issuer and explain or inform them that we need to have this information and a follow-up letter is sent. We go through a couple interations of that process, which for the most part has proven to be successful. However, after a while if the information is not forthcoming, then we will withdraw the rating.
Q: Did the agency ever have to do that?
A: Yes. Again, it doesn't happen too frequently. So far in 1993 we have had to withdraw 16 ratings because of the lack of timely information.
Q: Is that about average?
A: I would say so. That's pretty average figure -- 16 out of 13,100 uninsured ratings outstanding. So that works out to about a 10th of a percent.
Q: Do you think that's a good incentive, to withdraw the rating?
A: Yes. We believe so. It's proven to be an effective mechanism for obtaining this kind of information. And also if a rating is withdrawn and an issuer wants to have the rating reinstated, there is a fee we charge in order for us to reinstate the rating.
Q: This new process that you put together earlier in the year to set up this schedule, how does this benefit the market, the bondholder? Do you believe if gives Standard & Poor's the edge over its competitors?
A: Yes, we believe it does. We are stating to the marketplace with what frequency we will be comprehensively reviewing our ratings. So the marketplace has some idea as to how frequently they can expect to receive a written update on the ratings that we have.
Q: Has there been any feedback on the new system from investors or issuers?
A: The feedback thus far has been somewhat limited. To the extent there has been feedback, it's been positive.
Q: A number of proposals are floating around the market to improve secondary market disclosure. If any of the proposals take effect, will that make Standard & Poor's surveillance job easier?
A: I would say not. I don't believe so. Again, the issuers we rate have a high compliance rate in getting us the information we need in order to maintain the rating.
Q: and A:
Earlier this year, Standard & Poor's Corp. formalized its customary process for secondary market disclosure and surveillance involving its municipal surveillance group.
Comprehensive reviews will be performed every one to three years, depending on the rating and the kind of credit. A BBB-minus-rated health care credit, for example, would be reviewed annually, while an AA general obligation credit would be reviewed every three years.
With the market pushing for greater disclosure, the rating agency also broached the possibility of serving as a conduit for secondary market information. Since then the debate over disclosure has heated up, with the Securities and Exchange Commission declaring in September that it will issue standards for disclosure.
Standard & Poor's is the only one of the big three rating agencies to spin off ongoing credit surveillance into a separate department. At Moody's Investors Service and Fitch Investors Service, that function is performed by the same group of analysts that rates bond issues. Jon Reichert, a director at Standard & Poor's who heads the agency's municipal surveillance group, recently spoke with Chicago bureau chief Karen Pierog about the agency's efforts in the disclosure area.
