Friday, March 7, 2014
Just a week after Moody's Investors Service downgraded its outlook on Maine's economic health, the rival debt-rating agency Standard & Poor's took the opposite position Friday, improving its outlook on Maine.
WHAT IT MEANS
DEBT RATINGS gauge the ability and willingness of an issuer, such as a corporation or municipality, to meet its financial obligations completely and on time. They also reflect the credit quality of an individual debt issue, such as a corporate note, a municipal bond or a mortgage-backed security, and the relative likelihood that the issue may default. The ratings are not guarantees that a bond will be repaid or that an investment is sound. An explanation of ratings from Standard & Poor’s:
AAA: Extremely strong capacity to meet financial commitments. Highest rating.
AA: Very strong capacity to meet financial commitments.
A: Strong capacity to meet financial commitments, but somewhat susceptible to adverse economic conditions and changes in circumstances.
Source: Standard & Poor’s
Both agencies affirmed their existing ratings on nearly $500 million in bonds that have already been sold.
Deputy State Treasurer Barbara Raths said both debt-rating agencies assessed the state's financial picture at the same time, before a $55.8 million bond offering on May 31.
Despite their different views, both agencies focused on similar issues that could affect the state's credit rating, including its cash reserves and Medicaid costs.
"It's not uncommon to have different views," said Charles Colgan, professor of public policy and management at the University of Southern Maine's Muskie School of Public Service. "In the last few years, Maine has not grown very much. If you look at the state budget issues, you could have a 'half empty' and 'half full' view. It's not at all surprising that people are reading the same information differently."
The change in outlook came as Gov. Paul LePage vetoed a $20 million bond proposal for research and development, and allowed four other bonds to go to voters in November without his signature.
Standard & Poor's said it improved Maine's outlook based on its "significant progress" in cutting its deficit and unfunded pension liability.
"While these developments are encouraging, MaineCare, the state's Medicaid program, continues to face operational and fiscal challenges," said Standard & Poor's credit analyst Ken Rodgers.
Standard & Poor's raised the outlook to "stable " from "negative," and maintained the state's "AA" credit rating, saying Maine has an improving economy, strong fiscal policies and practices, moderate debt and other liabilities, and adequate liquidity.
Earlier, Moody's took an opposite view of the state's issues and cut its outlook to "negative" from "stable." Moody's lower outlook creates the risk of a rating downgrade over the next 12 to 24 months, said Moody's, which cited the state's weak financial reserves and high Medicaid costs.
It's not the first time the debt-rating agencies have taken opposite views on the same bond issuer.
In August, Standard & Poor's made headlines for downgrading the United States' credit rating for the first time in the history of the ratings. It said that the deficit reduction plan passed by Congress had not gone far enough to stabilize the country's debt situation and that "political brinksmanship" in the debate had made the nation's ability to manage its finances "less stable, less effective and less predictable."
Moody's, Standard & Poor's and Fitch are the three main agencies that rate debt issued by governments and corporations. All three had issued warnings that the U.S. credit rating was in danger of a downgrade, though S&P was the only agency to cut the U.S. rating.
Both Standard & Poor's and Moody's left their ratings on Maine's bonds unchanged. The only changes came on the outlook, which will have minimal affect on the May 31 bond sale, analysts said.
State Treasurer Bruce Poliquin said he expects strong demand for Maine bonds at the offering.
"In maintaining our AA rating and raising the outlook to stable, S&P recognized Maine's success last year in eliminating $1.7 billion of our unfunded public pension liability," Poliquin said.
"S&P had Maine on negative watch for some time. Taking them off negative watch today is really a more significant action than when Moody's put them on negative last week," said Robert Lenna, executive director of the Maine Municipal Bond Bank. "Taking them off negative watch shows Maine addressed some of S&P's earlier concerns. S&P could have downgraded the rating, and they didn't do that."
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