One way investors evaluate a state or local government's risk of default is to analyze available financial information provided by the issuer or to obtain the current credit ratings of the issuer. An issuer's credit ratings is one of many factors that should be considered when analyzing a municipal bond investment, however ratings are inherently subjective. Credit ratings represent the opinions of the company issuing the credit rating. Also, credit ratings can change at any time and investors should understand that the rating shown on the official statement when the bond was first issued may not accurately reflect its current rating, explains Bradley Reifler.
Investors can obtain a current credit ratings from the broker or investment adviser on any bond they are considering purchasing, or use the EMMA website to verify the bond's credit rating assigned by Fitch Ratings or Standard & Poor's. Moody's Investors Service, is another popular source for independent credit ratings on municipal bonds.
A high credit rating is not a "buy" recommendation and does not provide any assurance of future market value or liquidity, says Brad Reifler. A high rating also should not be interpreted to mean that an investor will be able sell the bond at a particular time, especially prior to maturity, or that the investor will receive a particular price.
Conversely, a low credit rating dos not mean the issuer will default or fail to meet its repayment obligations. However, investors should understand that a low credit rating is suggestive of a bond's risk of default and investors should evaluate the risks of purchasing a bond with a low credit rating. Bonds with low credit ratings often carry higher interest rates than bonds with higher credit ratings to attract investors who are willing to assume greater risk.
Some bonds do not have credit ratings at all. While a bond lacking a credit rating is not, absent other factors, a sign of low credit quality, Bradley Reifler says that investors in unrated bonds should conduct their own due diligence and independently evaluate the credit risk associated with the unrated bonds.