RECENT CREDIT RATING UPGRADES AND
DISCLOSURE OBLIGATIONS

To better reflect the position of municipal credits compared to corporate credits, earlier this year Moody’s implemented its global rating system. This action caused upgrades of many municipal issuer’s underlying credit ratings, in some cases without the issuer’s knowledge or participation. Fitch also recalibrated its rating system which also caused upgrades on many municipal issuer’s underlying credit ratings. To date, Moody’s has recalibrated over 3,000 California municipal credits and state ratings as part of their global scale recalibration.
There are several reasons for the rating upgrades, ranging from quantitative to political in origin. These reasons could be the topic of a separate discussion but the rating upgrades do lead to several questions.

One of the questions created is: Do these unrequested surprise rating upgrades on already outstanding issues require a material event notice? Many bond counsels believe the answer is yes. Rule 15c2-12 that governs disclosure provides that issuers must give notice, as a material event, of rating changes. This includes rating upgrades. Therefore, notice is required. In order to determine whether an issuer received an upgrade, issuers should have received a notification from a rating agency or should contact the applicable rating agency to find out if they have received an upgrade.

The Municipal Securities Rulemaking Board (“MSRB”) has recently filed a request to the SEC to allow it to post these credit rating upgrades directly to the MSRB’s Electronic Municipal Market Access site (“EMMA”). This would eliminate the need for issuers to provide individual material event notices on such rating upgrades. In order to allow for the direct posting of credit rating changes to EMMA, the MSRB needs to reach agreement with each major rating agency. However, until the SEC makes a ruling, issuers should prepare and file material event notices with EMMA based on these upgrades.