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Tim Myers: Giving credit where credit is due

Myers’ Musings

Posted: August 29, 2009 9:45 p.m.
Updated: August 30, 2009 4:55 a.m.
Part One in a three-part series

Of all the various culpable actors in the Great Financial Crisis of 2007 and 2008 and the ensuing Great Recession, the private rating agencies like Standard and Poor's, Fitch and Moody's stand to come through with the least punishment.

Once-proud casino bankers now report directly to various arms of the federal government, and those who borrowed money for homes they could not afford now find themselves losing those homes.

But the rating agencies who placed their gilt-edged blessings on now-dodgy instruments will find little changed about their business, continuing their relationship of payment from the various institutions and investments they rated.

The Proverb writer stated succinctly that the rain falls on the righteous and the unrighteous alike.

There were the days when the markets welcomed the favorable ratings like a nourishing cool rain at the end of a long dry spell and allowed them to grease and fuel the liquidity and leverage frenzy that eventually led to the inevitable bursting asset bubble, but now the humbled and cowed ratings agencies pour their ignoble credit downgrades on the responsible and the irresponsible alike, further exacerbating the fast de-leveraging of the economy that leaves us in our current troubles.

And so several weeks ago, I did a double-take at my computer screen when reading the following shockingly counterintuitive item in The Signal and on the city of Santa Clarita's Web site:

n Santa Clarita's bond rating advanced to AA +

n City upgraded to second highest credit rating possible

The city of Santa Clarita's Standard & Poor's credit rating was upgraded yesterday from AA to AA +, and the city was characterized as having "very strong wealth and income levels." This is the city's third credit upgrade in five years.

I honestly thought this news item would garner a lot more attention, since in the current environment it constitutes nothing less than an individual walking in from a typhoon without a drop of water on him.

Now while the rating agency number-crunchers engage in complex and seemingly opaque analyses to arrive at their ratings, the underlying concepts remain simple.

A private company or public entity will receive a higher rating, and the attendant benefits of lower borrowing costs and smaller covenant and collateral requirements, if the rating agency deems they will most likely not default on their debt obligations.
With a private company, a rater will examine two things: The quality of the assets on the organization's balance sheet available for liquidation to repay the debt, and the amount of money generated from the company's business operations available to apply to interest and principle.

Now it would surprise no one that private companies, even those "blameless" in the liquidity bubble, now endure ratings downgrades.

Their financial-asset holdings stand at eroded levels from their bubble peak and the ensuing recession from the credit crunch reduces their prospects for earnings.

Turning to municipalities, the rating agencies cannot really look at assets.

A bondholder cannot really repossess a road, bike path, park or aquatic center built with borrowed funds.

Creditors must look solely to the revenue streams collected by the municipality from various sources and analyze the excess of the revenues over committed budget expenditures to reveal the cushion available to pay interest and principle.

If private companies are suffering a typhoon on the issue of creditworthiness, municipalities are suffering a tsunami.

Volatile sales-tax revenues on large-ticket items, primarily autos, sank like a rock in the last year.

For "boomburbs" like Santa Clarita, lavish fees related to the permitting and execution of real estate development also effectively evaporated with the loss of credit.

On the expenditure side, local and state governments find themselves equally slammed, obligating themselves to popular and expensive programs during the times of expanding revenues that are not easily adjustable during a downturn without deep and meaningful cuts to service that citizens now expect.

So how can it be that in this macrocatastrophe, the city of Santa Clarita actually gets a bond rating upgrade to just below the rarefied air of AAA?

Is Santa Clarita not subject to the same macroeconomic events happening in the greater world? Who found the magic bullet to move the city forward?

Next week we will begin to explore the details of this amazing story. Stay tuned.

Tim Myers is a Valencia resident and CPA who thinks numbers hold the key to everything. His column represents his own views and not necessarily those of The Signal.


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