Fitch’s new criteria could lead to 550 rating changes

Fitch Ratings’ new U.S. local government rating criteria is expected to lead to changes to about 550 ratings in the next six months.

Fitch adopted the new criteria — which will affect cities, counties, school districts, and special districts — after working on the revision since the fall. The criteria will also be used to assess tax-supported hospital districts, water and/or sewer utilities, public transit systems and other enterprises receiving tax support.

The change is expected to impact about 35% of 1,560 securities from 900 issuers, said Michael Rinaldi, Fitch head of U.S. local government ratings. Fitch will soon publish an “under criteria observation watch list” of securities that may be affected.

Not all securities on the list will experience a rating change, said Fitch Senior Director Evette Case.

Most changes will be a single notch and Fitch believes they will be fairly equally distributed between upgrades and downgrades, Rinaldi said. Fitch doesn’t expect any particular sector to be impacted more than others.

The new criteria provide a “more data-driven lens to communicate credit quality across the local government portfolio” and allows Fitch to respond to credit changes more quickly and easily, Rinaldi told The Bond Buyer. The update will allow Fitch to communicate more easily how particular changes in metrics could change credit ratings.

The new criteria also remove overlapping debt — separate debts from, for example, a county, town, and school district that add up and affect tax-paying households — from the long-term liability metric. The governments have reported this debt in different ways and on different schedules, making the impact hard to calculate.

While Fitch has used this data to look at the tax burden on households, it doesn’t seem to impact how likely a county is to pay its debt, Rinaldi said.

Issuers and municipal market participants gave input on the criteria revision, its first major local government rating change since 2016.

Meanwhile, S&P Global Ratings plans to replace its sub-sovereign U.S. public finance ratings criterion with a single one. The proposed criteria would apply to U.S. states, counties, municipalities, school districts, and special government districts. The comment period ended March 11.

“We believe bringing government entities under the same analytic framework increases transparency of our methodology, improves consistency and alignment of ratings across these government types, and enhances global comparability,” S&P said in a statement.

S&P said the new criteria would cover 10,700 ratings and probably change 5% of them. It doesn’t know yet when it might be introduced.