S&B Municipal Bond Ratings

Regulations of note

considering dodd frank and beyond

Under section 939A of the Dodd Frank and Wall Street Reform or Consumer Protection Act, Federal regulatory agencies are directed to remove references to, or reliance upon, the major rating agencies in regulations regarding credit assessment, including municipal bonds. In their place, community banks must follow “uniform standards of creditworthiness” to determine whether a bond is investment grade. Community banks are required to meet these standards in proportion to the size and exposure to risk each security in their portfolio.

While the exact method of investment grade investment analysis can vary from bank to bank, the OCC provides a rating matrix in the guidance that demonstrates key points of analysis for each type of security. For municipal government general obligations and revenue bonds (77 FR 35261):

  • "Confirm spread to U.S. Treasuries is consistent with bonds of similar credit quality"
    •     S&B Market Valuation Add-on

  • "Confirm risk of default is low and consistent with bonds of similar credit quality"
    •     The S&B Municipal Bond Rating is assigned by way of the S&B Municipal Bond Rating Modeling as an indicator of overall solvency and financial condition through a set of uniform S&B benchmarks.

  • "Confirm capacity to pay and assess operating and financial performance levels and trends through internal credit analysis and/or other third-party analytics, as appropriate to the particular security"
    •     S&B Municipal Bond Rating Modeling and financial indicator benchmarks focusing on capacity to increase revenues, manage expenses, and improve financial position, as well as maintain adequate liquidity levels

  • "Evaluate the soundness of a municipal's budgetary position and stability of its tax revenues. Consider debt profile and level of unfunded liabilities, diversity of revenue sources, taxing authority, and management experience"
    •     S&B Municipal Bond Rating Modeling and financial indicator benchmarks, focusing on capacity to meet budgets, increase the annual tax levy in response to changes in tax base and augment property tax revenues with alternative revenue sources. Consider the impact of debt levels and pension obligations on financial position and capacity to support future changes to these liabilities

  • "Understand local demographics/economics. Consider unemployment data, local employers, income indices, and home values"
    •     S&B Economic/Demographic Profile assigns overall and component performance levels by comparing demographic characteristics to other counties and states across the nation.


  • "Assess the source and strength of revenue structure for municipal authorities. Consider obligor's financial condition and reserve levels, annual debt service and debt coverage ratio, credit enhancement, legal covenants, and nature of project"
    •     S&B Municipal Bond Rating Modeling focuses on financial indicator benchmarks used in other municipal securities, while also focusing on rate covenants and coverage of debt service through adequate revenue generation and cash flow.


The S&B Municipal Bond Rating Scale is designed to be similar to the credit risk classifications associated with bank loan credit scales. S&B uses its two high risk ratings, an S&B 3 and an S&B 4, to monitor high risk securities. The S&B 4 rating is the highest risk rating and is assigned to "impaired" or non-investment-grade securities. S&B 4 rated securities are classified as "Doubtful" or "Loss."

The S&B 3 rating is an investment-grade rating assigned to a security that should be monitored closely due to either overall financial weakness or a material event that could impact solvency. The S&B 3 is divided into an S&B 3+, an S&B 3, and an S&B 3-. An S&B 3 rating is equivalent to a "Special Mention" loan that S&B advises clients to monitor closely. An S&B 3- rating is equivalent to a "Substandard" loan classification. An S&B 3+ is also a watch credit but still exhibits financial strength in certain areas.