A new study by Standard & Poor’s revealed that a greater number of municipal bonds have received better ratings over the past 20 years, while no highly rated municipal debt has defaulted during that same period.
The study’s findings are consistent with similar reviews conducted periodically by S&P and other credit agencies.
According to the latest study, ratings improved significantly in the highest categories, “AAA” and “AA.” Credits rated “AAA” increased from 0.7% of all ratings in 1986 to 2.6% in 2006. Similarly, “AA”-rated credits increased from 19.5% to 32.7% over the same period. Non-investment grade credits were below 2% of the total through the entire period.
The study covered unenhanced, rated municipal debt from 1986 to 2006.
S&P noted that the broad trend in improved ratings occurred despite a changing economic environment, tax reform and other major social and political events, including 9/11.
Long-term stability
The study’s findings emphasized the stability of ratings overall, and the fact that higher ratings tend to be more stable than lower ratings. Still, defaults are rare. During the 20-year period, no municipal debt rated by S&P in the top two rating categories defaulted. S&P attributed its findings to the stability of local governments and the economy in general.
Studies by S&P and others have concluded that tax-exempt credits are stable performers and reliable investments. In order to access the municipal market, issuers of tax-exempt bonds must meet stringent IRS criteria, chief of which is the requirement that bond proceeds must be used for an essential public purpose, which helps ensure that government, and the public, have a vested interest in the success of the project being financed.
Whether bonds are used to build schools, highways, or a new wing on the local hospital, the importance of the project contributes to a high likelihood of payment – and a strong and stable credit rating.
