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Municipal Bond Forum
FMSbonds, Inc.'s Bond Forum™ is an exclusive opportunity for investors to submit questions and comments on the bond market or to respond to one of our articles.
To participate, just send us an e-mail. Be sure to include your name or initials and your state of residence. Posted e-mails may be edited for length and clarity. If you prefer a private response, please note that in your e-mail. Responses are provided by James A. Klotz, president and co-founder of FMSbonds, Inc., a municipal bond specialist for more than 35 years; Dr. Jay H. Abrams, chief municipal credit analyst; and other members of the firm as noted.
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Los Angeles GO debt rated higher than the states
5/11/2012I’ve read that Los Angeles will file for bankruptcy, but I can’t find anything to confirm this. I do know that the city’s deficit is in the hundreds of millions. So far, my bonds tied to Los Angeles are holding up in value. Most are revenue bonds. What would happen to the revenue bonds, such as the LA DWP, should the L.A. general fund become insolvent?
- S.W., CaliforniaIf Los Angeles is teetering on the brink of bankruptcy, it is news to us and to the major rating agencies.
Actually, the city's General Obligation debt is rated higher than the state of California’s. Moody's rates Los Angeles “AA3,” while Standard & Poor's assigns it a rating of “AA-” with a stable outlook. These ratings were reviewed in March 2012.
These ratings primarily reflect the city's extremely large and relatively stable property base, which experienced an uptick in fiscal 2012. L.A. has only had a moderate direct-debt burden comprised mostly of fixed-rate, rapidly retired debt. Its local economy is sluggish but slowly expanding.
The L.A. Department of Water and Power is not related to the General Obligation debt of the city, but is rated “AA” on its own merit. These bonds are payable from the retail water system's net revenues derived from more than 660,000 customers. It is the state’s largest retail water supplier and enjoys a broad and mature revenue stream.
In summary, we see no need for concern regarding your investments in these issues.
Underwriters determine rates
5/11/2012I have been hearing for several years that municipalities had to increase interest rates in order to attract buyers. Is that correct?
- V.C., CaliforniaBond rates are not determined by the issuer; underwriters determine the rates, based on credit quality and marketability. Municipal bonds have no problem attracting buyers. In fact, over the past decade, there has been a surge of investments in munis.
Why are some cities and states rated higher than the Treasury?
4/23/2012I have a question about the way rating agencies work. Certain municipalities across the nation and in California are rated “AAA,” while the U.S. Treasury is rated only “A.” This discordance is silly. What are your thoughts?
- J.S., CaliforniaOn August 6, 2011, Standard & Poor's downgraded the U.S. Treasury from “AAA” to “AA+,” where it remains today. Moody's & Fitch have continued to maintain their “AAA” ratings on the U.S. Treasury, but have added a "negative outlook" designation. Negative Outlook means that over the longer term these ratings will be reviewed for possible adjustment.
States and municipalities are not permitted to run deficits, sovereign governments can.
This report is produced solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. This report is based on information obtained from sources believed to be reliable but no independent verification has been made, nor is its accuracy or completeness guaranteed.