06 - Laserfiche WebLink

BACKGROUND The turmoil in the municipal bond markets has brought into focus the higher standards imposed by the three major rating agencies in rating municipal bonds compared to corporate bonds, mortgage-backed securities and other debt instruments. As most investors know, state and local government entities rarely default on their bonds. Yet municipal ratings fail to reflect that fundamental fact. DISCUSSION Moody's has typically been utilized by the City of Pleasanton to rate our long-term bond offerings. Moody's bond rating scale is as follows: • Aaa -Judged to be of the highest quality, with minimal credit risk. • Aa -Judged to be of high quality and are subject to very low credit risk. • A -Considered upper-medium grade and are subject to low credit risk. An "A" rating is further defined by A1, A2 or A3, with Al being the higher quality. • Baa -Subject to moderate credit risk. They are considered medium-grade and as such may possess certain speculative characteristics. • Ba -Judged to have speculative elements and are subject to substantial credit risk. • B -Considered speculative and are subject to high credit risk. • Caa -Judged to be of poor standing and are subject to very high credit risk. • Ca -Highly speculative and are likely in, or very near, default, with some prospect of recovery of principal and interest. • C -The lowest rated class of bonds and are typically in default, with little prospect for recovery of principal or interest. The rating agencies own studies show governmental, or municipal, issuers default much less than corporate issuers. • Municipal bonds rated Baa by Moody's have experienced a default rate of only 0.13 percent, while corporate bonds rated Aaa by Moody's have defaulted at four times that rate, or 0.52 percent. • Corporate bonds rated AAA by S&P have defaulted at almost twice the rate of municipal bonds rated BBB (0.60 percent and 0.32 percent, respectively). Standard & Poor's acknowledges that the historic rate of defaults of A-rated municipal bonds is 0.23 percent, while that of corporate bonds is 2.91 percent - or 13 times greater! • Of all general obligation municipal bonds rated by 2006, only one issuer defaulted. • For atax-backed bond rated BBB or better by S&P, a 20-year period is only 0.03 percent. Moody's between 1970 and the likelihood of default over Page 2 of 3