The Wall Street Journal ran an odd article yesterday about the unpredictability of sovereign credit ratings that are below the investment-grade cutoff (BB+ and lower). Check out the table from the IMF of S&P’s sovereign ratings.
Jefferson County, Alabama is getting a lot of attention as it negotiates with the holders of $3 billion of sewer bonds. The county would like to pay $2 billion to settle the $3 billion of bonds outstanding and limit the rate increases county residents would have to pay. This arrangement would pay bondholders (led by JP Morgan) 66 cents on the dollar — not a great recovery but not outrageous either. Bondholders want the state to guarantee this new arrangement and stand ready to pay in the event of another default.
A quick and dirty way to evaluate the credit quality of a borrower is to look at his debt load relative to revenues. It’s not a perfect measure — it doesn’t take into account whether that debt is repaid over many years or whether it’s all due at once, for instance — but it suggests why investors view some states as better risks than others. I’ve made a set of charts so we can compare debt loads and revenues for the states in a simple, visual way. The amount of debt load is indicated by the full height of the bar. (Please note the vertical scales of the charts vary. California is the highest borrower by far.)