(Bloomberg News) West Haven, Connecticut, which has closed four school buildings over the past two years and fired 14 teachers to help cut its budget deficit, is about to pay Moody's Investors Service almost double what it cost six years ago for a credit rating.
Joseph Mancini, finance director for the city of 55,000 near Yale University, says he has no choice other than to meet the demands of Moody's after the municipality's bonds were downgraded to Baa1 in January, three levels above junk, from A2.
"The market's going to punish us for the rating we're at," Mancini said in a telephone interview. "If we didn't get it rated, we would be punished even more."
Four years after faulty ratings helped trigger the worst financial crisis since the Great Depression, Moody's and Standard & Poor's are as dominant as ever, boosting fees at a faster rate than inflation as new competition promised by lawmakers failed to materialize.
New York-based Moody's raised its rates by 5 percent on average this year, and may impose a similar increase in 2012, Chief Executive Officer Ray McDaniel said at a conference for stock investors on Nov. 8.
Even after provisions of the Dodd-Frank Act cut reliance on ratings and encouraged more companies to enter the industry, the $40 trillion worldwide bond market mostly follows the same rules that have determined since the 1930s who gets access to cash and at what interest rates.
"If I don't have two ratings on a bond, I cannot sell it," said Timothy Cox, executive director of debt capital markets at Mizuho Securities USA Inc. in New York, who's been working in the fixed-income market for 30 years. "No money manager is going to buy it," he said in a telephone interview.
At least one of the three biggest credit-rating companies was hired for 98 percent of municipal bonds bigger than $50 million this year, up from 94 percent in 2007, according to data compiled by Bloomberg. About 99 percent of U.S. corporate issues have a grade from one of the three, compared with 98 percent four years ago, the data show.
Cities and states are paying higher fees even as Moody's gives them lower grades relative to companies, according to a study released in August by professors at Indiana University, American University and Rice University. The company favors bonds backed by assets such as mortgages, which cost more to rate, the study showed. Moody's said the study is flawed.
Little Competition