Nick Anhut, Senior Municipal Advisor
Kayla Thorpe, Associate Municipal Advisor 

Key Considerations & Best Practices

As many municipalities develop and execute financing plans for their capital projects, one of the most important steps is preparing for and undertaking the credit rating call. Regardless of a proposed borrowing’s size or scope, thoughtfully preparing for the rating call can reap both short- and long-term benefits for your community – most specifically your cost of and access to capital. There are several key considerations and best practices relative to rating call preparation which, when followed, go a long way in setting your municipality up for success!

What is a Credit Rating?

You are not alone if you are asking yourself “what exactly is a credit rating and why is it important?”  Credit ratings are developed by credit rating agencies to provide investors with an independent assessment of the issuer’s ability and willingness to repay their debt obligations, as well as any other key credit features of the financing itself. These trusted sources help the marketplace differentiate the risk profile of one bond issue from the next. As such, a credit rating can have a direct impact on the interest rates and transactional costs associated with a debt issuance. The three primary rating agencies in the United States are Moody’s, S&P Global Ratings (S&P) and Fitch Ratings.

There are many factors credit rating agencies evaluate when assigning a rating. For municipalities with general obligation debt, this includes an understanding of the issuer’s history and characteristics including tax base, local economic conditions, finances, management, and long-term liabilities. Factors for revenue-secured debt issuances, such as Utility Revenue Bonds, include evaluating the sustainability of user rates, the overall financial condition of the enterprise producing the revenues securing the debt, the composition and diversity of the revenue and customer base, total amount of leverage, and the covenants underpinning the debt issue that generally protect bondholders.

All municipal securities are eligible for a credit rating, but municipal borrowers and their municipal advisors should assess whether a rating is appropriate or necessary. The benefits of a credit rating should outweigh the costs, time, and efforts associated with seeking a rating.  This should be measured over the anticipated life of a debt issue, as all ratings require ongoing surveillance by the rating agency and some even come with annual cost to the issuer.  Additionally, the ability to secure other forms of credit support such as state credit enhancement programs or bond insurance should be factored into the cost-benefit analysis.

The Rating Process Explained

The credit rating process can seem daunting for even the most sophisticated issuers. Rating agencies are regulated entities that use a predetermined set of criteria, or “Methodology” as a starting point in the evaluation of a municipality issuer and its proposed debt issue. The  ensuing rating call helps provide additional context relative to objective rating factors and may uncover evidence to adjust an indicated rating either up or down for subjective measures.

Municipal borrowers typically select individuals among their elected and appointed officials to participate on the rating call based on the primary opportunities or challenges that will likely be addressed. The rating call process is generally conducted via a virtual meeting which can accommodate a formal presentation prepared by the issuer and its municipal advisor, if needed. The call also includes the rating analyst facilitating a structured discussion from a prescribed list of questions submitted to the issuer in advance of the meeting.

Following the rating call, the rating analyst will present an evaluation and recommendation to the firm’s credit committee comprised of senior analysts from across the country, who collectively assign the credit rating. Because each of the three major agencies rely on slightly different taxonomies for their ratings, they can sometimes be confusing. The below chart outlines the credit grades for Moody’s, S&P, and Fitch.

Following the credit committee review and assignment of a rating, the rating agency will then prepare a press release and report detailing its analysis and considerations underpinning its decision. Traditionally, the rating agency affords the borrower a short window of opportunity to review these documents for factual errors, omissions, or the inadvertent inclusion of confidential information before It releases them to the public.

Rating agencies also conduct surveillance reviews throughout the life of the issue which are designed as a “status check” for the benefit of those relying on the rating. The rating agency may reach out to the issuer with questions during the surveillance review process and it’s important to respond to these requests in a timely manner. If contacted, we certainly recommend contacting your municipal advisor to help formulate the required response.

Preparing for a Rating Call

We commonly field questions from our clients about best practices for rating call preparation and what specific factors could potentially lead to a credit rating upgrade or downgrade.

If you are presently rated, reviewing your past credit rating reports and presentations is an important first step. Doing so will provide context to any credit strengths or weaknesses the rating agency identified in the past. Being able to address a mitigation or remedy to a credit weakness can be very helpful in maintaining or upgrading your credit rating.

Rating agencies gather quite a bit of information to help them understand the financial health of an issuer. Traditionally, they request:

1. 1-2 years of most recent audited financial statements
2. Current and prior year budgets for major funds

• Any formal or informal long-range financial plans including an adopted capital improvement plan and any planning documents such as a financial management plan

1. Adopted financial policies such as fund balance, debt management and investment policies
2. Tax base information not already included in the Preliminary Official Statement
3. Customer base information for utilities

The next step in effectively preparing for a rating call is engaging with your municipal advisor to discuss any hot button issues or expected stressors, the most effective means to deliver details you wish to specifically address in the absence of questions, responses to agency questions, and any expectations you may have for the call itself.

Another common question we hear from municipalities is whether there is any benefit to a site visit versus the traditional virtual meeting.

On-site rating reviews and tours may be beneficial to show rating analysts the size and scope of  a community’s growth, the diversification of the local tax base and economy, and any other unique characteristics that are better demonstrated in-person. This format can be particularly helpful if an issuer is on the cusp of a rating upgrade or embarking on a major capital financing initiative that may materially skew rating metrics before stabilization occurs.

Such was the case with the City of Fitchburg, Wisconsin. In 2024, the City requested an on-site evaluation with Moody’s, with the express purpose of seeking a rating upgrade to Aaa. Though the issuance was financing standard capital improvement projects, the City prepared a comprehensive presentation to demonstrate it meets and exceeds the rating criteria to secure the upgrade to top-tier status.

City staff consulted with Senior Municipal Advisor Greg Johnson on preparing a presentation to showcase the City’s growth, planned development, and secure financial position. The City had historically incorporated Moody’s criteria into its financial policies, primarily regarding fund balance thresholds and leverage within its debt policy with the longer-term goal of meeting the necessary benchmarks to secure a rating upgrade. After several years of thoughtful planning, the City invited Moody’s to Fitchburg for a formal presentation and community tour.

In this case, the onsite visit proved fruitful, as Moody’s awarded the upgrade and assigned the City a Aaa credit rating with analysts specifically noting community growth as a credit strength

Preparing for and executing a rating call does not have to be a daunting task. Working with your municipal advisor on rating review preparation can help ensure credit strengths are highlighted, and credit weaknesses are transparently addressed.  Additionally, your municipal advisor can help craft a message that positions the community for a favorable outcome by proactively addressing past comments or credit weaknesses and highlighting the short- and long-term planning efforts a community may be undertaking. Ehlers’ primary goal in collaborating with clients on this critical work is to assist the issuer with putting its best foot forward in order to secure the generational benefits associated with seeking to achieve the lowest cost of capital. We are always here to help.

Required Disclosures: Please Read

Ehlers is the joint marketing name of the following affiliated businesses (collectively, the “Affiliates”): Ehlers & Associates, Inc. (“EA”), a municipal advisor registered with the Municipal Securities Rulemaking Board (“MSRB”) and the Securities and Exchange Commission (“SEC”); Ehlers Investment Partners, LLC (“EIP”), an investment adviser registered with the SEC; and Bond Trust Services Corporation (“BTS”), holder of a limited banking charter issued by the State of Minnesota.

This communication does not constitute an offer or solicitation for the purchase or sale of any investment (including without limitation, any municipal financial product, municipal security, or other security) or agreement with respect to any investment strategy or program. This communication is offered without charge to clients, friends, and prospective clients of the Affiliates as a source of general information about the services Ehlers provides. This communication is neither advice nor a recommendation by any Affiliate to any person with respect to any municipal financial product, municipal security, or other security, as such terms are defined pursuant to Section 15B of the Exchange Act of 1934 and rules of the MSRB. This communication does not constitute investment advice by any Affiliate that purports to meet the objectives or needs of any person pursuant to the Investment Advisers Act of 1940 or applicable state law. In providing this information, The Affiliates are not acting as an advisor to you and do not owe you a fiduciary duty pursuant to Section 15B of the Securities Exchange Act of 1934. You should discuss the information contained herein with any and all internal or external advisors and experts you deem appropriate before acting on the information.