Bond Rating Process in Charles County

In Charles County, following an approximate determination in early Winter of the how much in bonds the County needs to sell to satisfy its capital  projects’ cash needs and  contractual obligations  for the coming year, the County’s Fiscal Services Department begins the process of preparing a preliminary  “official statement” for the upcoming bond sale. The official statement is a detailed disclosure document providing a  comprehensive overview of County government’s financial and management structure and the term, structure, type (e.g., general obligation, revenue, tax-exempt, taxable, etc.), amount and purposes of the particular bond issue. When in final form, the official statement is used to market the bonds. The draft official statement is sent to each rating agency which will rate county bonds and, along with the most recent annual financial report, budget and other pertinent documents, is carefully reviewed prior to the assignment of a rating.

During the period of preparation for the bond rating and sale, the County consults with its bond counsel, who ultimately must render an opinion on the legality and tax or non-tax exempt status of the bond issue (determined by the purpose of the bonds in accordance with IRS regulations). Without this opinion, the bonds could not be effectively sold. The opinion of bond counsel is a form of assurance for issuers and investors that all legal requirements are met and that the bonds are binding obligations of the issuer. The County’s outside financial advisor also works with the County and rating agencies during this period to assure any emerging concerns of the rating agencies are identified and  how best for the County to address them.

Traditionally, in February (although this could occur at any time of the year depending on when the County decided to schedule its bond sale), the County Commissioners, County Administrator and Fiscal Services and Budget Directors, accompanied by their financial advisor and bond counsel, travel to New York City to visit with each rating agency that will render a bond rating on the issue. These meetings are held separately with Moody’s Investor Service, Standard and Poor’s and Fitch Ratings, and give the County the opportunity to present its case for the highest possible rating for its bonds and for the rating agencies to address directly any questions they may have.  Following an overview of the County, and significant developments since the last bond rating, the County briefs from a detailed financial booklet prepared specifically for the rating agency presentations. The booklet contains such information as fund balances, debt ratios, financial projections, past and present budgetary trends, assessable base growth, demographic data and a host of other meaningful financial indicators. The sessions also give the County a chance to explain its plans to address any financial trends or conditions which might be considered to be negative.

Upon conclusion of these meetings and return to the County, the County Fiscal Services’ staff provides any additional follow-up information requested by the rating agencies, fine tunes the Official Statement, and awaits the final ratings of each agency for inclusion in the Official Statement. These ratings are usually rendered from two to three weeks later, after the rating agency analysts have received and digested additional data, reflected on the results of the meetings, prepared their recommendations and met with their respective credit committees. These ratings reflect the rating agency assessment of risk to investors and largely determine what interest rate the County will receive on its bond issue.

The following table shows the comparable investment grade ratings of the three major rating agencies:

Generally the higher the rating, the lower the interest rate the County will have to pay on its bonds. Bonds with ratings below these levels would be considered “junk” bonds.

The criteria the rating agencies consider in assigning ratings to a bond issue generally fall into the following broad categories:

• Economy
• Debt Structure
• Financial Condition
• Demographic Factors
• Management practices of the governing body and administration

Charles County bonds are currently rated AA+, AA and Aa2 by Fitch, Standard and Poor’s and Moody’s, respectively, and may be upgraded or lowered with each bond issue depending on rating agency analyses. Rating upgrades are usually incremental and may take years of continuing positive results to achieve. The County’s 2010 bond ratings are expected sometime during the 3rd week of March.