Wall Street: Assessing Gilt

AAA may mean the American Automobile Association to millions of Americans, but to cities, states and corporations in search of money it is a supreme symbol of solvency, the highest accolade Wall Street can bestow. Armed with that much-sought but carefully dispensed rating, a borrower can attract more investors, get by with paying lower interest rates on loans, and generally profit by the blue-chip aura that prime rating bestows in the business world.

As more and more local and state governments look to bond offerings for financing — a new record of $10.3 billion in bonds will be offered this year —a high bond rating becomes all-important. Last week, for example, when the state of California offered the largest tax-exempt issue floated this year, for $150 million worth of school and general construction bonds, its AAA rating quickly attracted all the lenders it needed.

Trusted Guide. Because investors generally follow their decisions to the letter, the few bond houses that judge who will receive what ratings have become powerful and much-wooed forces in U.S. finance. Even before borrowers register their plans with the Securities and Exchange Commission, they call on one or all of the nation’s three bond-rating services—Dun & Bradstreet, Moody’s and Standard & Poor’s. With briefcases stuffed full of balance sheets and revenue and repayment schedules, they are quizzed by committees of experts. Of the two largest services, Standard & Poor’s makes 11,000 ratings a year, Moody’s 9.000. “It is a judgment of analysts,” says Moody’s Vice President Edmund Vogelius. “No computer can come up with a rating.”

After every detail is weighed, the committee hands down its decision in a terse alphabetical shorthand. At Moody’s, which pioneered the rating system back in 1909, the four top grades are Aaa, Aa, A and Baa, ranging from prime quality to faintly speculative. Standard & Poor’s goes in for the upper case: AAA, AA, A and BBB. Dun & Bradstreet, which also owns Moody’s but makes its own independent assessments, spells out its scale: prime, better good, good, medium good.

The idea of the ratings is to provide investors with a handy, trusted guide to the borrower’s ability to repay. Below the top four grades, down through the Bs and Cs, come the outright speculative bonds. A Standard & Poor’s C means that the borrower is not paying interest; D is the lowest, warning investors of a default. For the borrower, the difference of one grade can mean a difference of as much as .5% in the interest rate.

No Hesitation. Though the bond houses inspect the same figures and usually arrive at comparable ratings, Moody’s has the reputation of being more conservative, while Standard & Poor’s gives greater consideration to future prospects. Last October, for example, Moody’s bumped New York State from its prime rating of Aaa to a high-quality rating of Aa because of its concern over the state’s need to find new sources of tax revenue. Standard & Poor’s stuck by its AAA rating, and so did the bond market, which snapped up the New York bonds without hesitation. Deep in debt from urban renewal, Baltimore last month took a one-grade demotion from Moody’s, from Aa to A. Dun & Bradstreet, on the other hand, recently decided that Camden. N.J., deserved a promotion to “good.”

The importance of a good bond rating became especially clear last week when two separate Mississippi issues were put on the market. Bankers hardly nibbled at-the first one, a $24.6 million water-supply-district issue bearing a Baa rating. The rating made the real differ ence, Wall Streeters insisted, and not a plea by the National Association for the Advancement of Colored People for investors to boycott the state. The next day two Mississippi school-improvement issues totaling $8,775,000 were snapped up by two New York syndicates. Moody’s (Aa) and Standard & Poor’s (A) had decided that the school bonds had enough gilt on their edges.