Municipal Securities – Understanding Credit Ratings

March, 2012:

In our continued effort to educate the investing public about various aspects of the securities markets, we are providing the below information. Because this information is being provided for educational purposes only, it should not be relied upon as providing legal or investment advice. Moreover, it is not intended to be complete in all material respects. If you have any questions concerning the information set forth below, you should contact a qualified professional.

Before purchasing, during your holding period and upon sale of a municipal security, it is important that you attempt to understand the credit ratings of the particular investment involved. This information will help you determine whether or not a particular transaction is in line with your investment objectives.

Understanding Credit Ratings

EMMA displays current long-term rating and underlying or unenhanced ratings for municipal securities as provided by Fitch Ratings and Standard and Poor’s.

A municipal security’s credit rating is the grade a rating agency assigns to indicate the risk of default. Ratings are intended to measure the probability of the timely repayment of principal for and interest on municipal securities and represent the opinion of the rating agency and not a statement of fact or recommendation to purchase, hold or sell a security. Municipal securities can receive a rating at the time of issuance or at any time over the life of the security, and such rating may be changed or withdrawn at any time. There are no requirements for municipal securities to be rated or, if a security has received a rating, to be rated by all rating agencies.

Multiple ratings may be assigned to a municipal security by a single rating agency. Typically, a bond will receive a “long-term” rating, which reflects the rating agency’s opinion about the overall risk of default for the municipal security, taking into account the effect of any credit enhancement features, such as bond insurance or other forms of third party guarantee or support. In the case of some notes or other short-term obligations, the rating agency may instead assign a “short-term” rating – such short-term rating would reflect the rating agency’s opinion concerning the risk of default on maturing payments or, in the case of a long-term obligation that has certain short-term tender/put features, reflect the rating agency’s opinion concerning liquidity risks associated with such short-term feature. Further, if the municipal security’s rating is based on any credit enhancement features, the rating agency may also assign an “underlying” or “unenhanced” rating expressing an opinion on the credit quality of a municipal security independent of any credit enhancement features. EMMA USERS SHOULD REFER TO THE SPECIFIC RATING DEFINITIONS PROVIDED BY EACH RATING AGENCY TO GAIN A MORE COMPLETE UNDERSTANDING OF THE MEANINGS OF RATINGS ASSIGNED BY THE RATING AGENCIES. Users are cautioned that rating agencies may assign different meanings to similar terms.

The three rating agencies that routinely issue ratings for municipal securities are Fitch, Inc. (Fitch Ratings), Standard & Poor’s Ratings Services (Standard & Poor’s) and Moody’s Investors Service, Inc. All of these rating agencies are registered with the Securities and Exchange Commission (SEC) as Nationally Recognized Statistical Rating Organizations (NRSRO) and a full listing of the NRSROs can be found on the SEC’s web site. Effective November 2011, the Municipal Securities Rule Making Board’s (MSRB) EMMA website displays ratings for municipal securities currently assigned by Fitch Ratings and Standard and Poor’s based on their agreement to make them available to the public through the EMMA website. The MSRB has committed to displaying on the EMMA website the ratings for municipal securities assigned by an NRSRO that agrees to make them available to the public through the EMMA website, subject to the terms of the applicable MSRB filing with the SEC. You can view a video about credit ratings on EMMA.

EMMA displays the current long-term rating and underlying or unenhanced ratings as provided by Fitch Ratings and Standard and Poor’s. EMMA also displays additional information provided by these rating agencies, including forward-looking statements concerning the likelihood that a rating may change. The amount of information displayed for each security varies and it is important to note that not all municipal securities are rated by Fitch Ratings and Standard and Poor’s. In particular, a municipal security for which no rating information is shown on the EMMA website may be rated by other rating agencies that have not agreed to make their ratings available to the public through the EMMA website. Similarly, a municipal security for which rating information is shown on the EMMA website from Fitch Ratings and/or Standard & Poor’s may also be rated by other rating agencies that have not agreed to make their ratings available to the public through the EMMA website. A lack of a rating from one or both of these rating agencies for a particular municipal security does not necessarily indicate that the security is any less or more creditworthy than other municipal securities.

Ratings that are displayed on the EMMA website are received by EMMA through automated data feeds from Fitch Ratings and Standard and Poor’s. These feeds provide ratings information to the MSRB throughout the day, typically providing information on individual rating actions on specific municipal securities. In addition, the rating agencies provide periodic large-scale updates on all or a broad range of municipal securities they rate. The display of ratings on EMMA indicates both the date on which a specific rating action has been taken by a rating agency, as reported to EMMA in the data feed (shown as an “effective” date next to the applicable rating), and the date and time when the rating agency last provided to EMMA information regarding the municipal security through its automated data feed (shown as the date and time at which the information was “last updated,” which generally would reflect the most recent time that EMMA received information for such municipal security on a specific rating action or a large-scale update). Thus, the “effective” date reflects the date on which a rating agency has taken a rating action, whereas the “last updated” date and time reflects the “freshness” of the information provided by the rating agencies.

EMMA USERS SHOULD BE AWARE THAT RATINGS INFORMATION APPEARING ON THE EMMA WEBSITE IS CURRENT AS OF THE “LAST UPDATED” DATE AND TIME INDICATED ON THE EMMA WEBSITE, AND THE MSRB TAKES NO RESPONSIBILITY FOR INDEPENDENTLY VERIFYING THE ACCURACY OR TIMELINESS OF THE RATINGS INFORMATION PROVIDED BY THE RATING AGENCIES THROUGH THEIR DATA FEEDS. THE EMMA WEBSITE DISPLAYS ONLY THE CURRENT RATINGS INFORMATION FOR ANY SECURITY AND DOES NOT DISPLAY HISTORICAL RATINGS INFORMATION. Thus, if the rating for a municipal security has been changed by a rating agency, the prior rating will no longer be accessible through the EMMA website. EMMA users wishing to obtain information regarding prior ratings or about when rating actions may have been taken should contact the rating agency or issuer, or can check to see if any “Rating Change” continuing disclosure filings have been made with EMMA in connection with such municipal security.

At times, rating agencies may take rating actions that are not immediately included in the data feeds but may instead be released initially through other means, such as a press release or spreadsheet posted on their websites. To view any potential rating action that may have been taken by a rating agency on a municipal security since the last update received by EMMA, or to understand the meaning of the ratings and other information provided by each rating agency, please refer to the information available on those agencies’ websites. In addition, rating agencies may make available, for free or for a charge, additional research or other analytical information in connection with their ratings or the marketplace in general.