CHICAGO, April 16, 2013 /PRNewswire/ -- Morningstar, Inc. (NASDAQ: MORN), a leading provider of independent investment research, today published a research report about State Permanent Fund Programs, one of four types of state credit enhancement programs, and how we believe they affect fundamental credit analysis of individual bonds. State credit enhancement programs are debt assurance programs offered by state governments to local municipal entities. The state promises to deliver debt payments on bonds when the actual borrower fails to make the payments to bondholders.
Morningstar organizes state credit enhancement programs in the following categories: State Permanent Fund Programs, State Guarantee Programs, State Appropriation Programs, and State Intercept Programs.
State Permanent Fund Programs, the focus of Morningstar's research report, are similar to an endowment and are created by a state's constitution or legislation.
In the report published today, Morningstar's municipal credit research team examined the credit quality of the three main State Permanent Fund Programs available in the United States: Nevada Permanent School Fund Bond Guarantee Program, Texas Permanent School Fund Bond Guarantee Program, and Wyoming School District Bond Guarantee Program. Morningstar rated the overall credit strength of State Permanent Fund Programs as "Good" on a scale of Good, Fair, and Poor.
"We undertook this research to better inform investors about how the credit quality of state credit enhancement programs affects the credit quality of local municipalities, most often public school districts. Many investors are exposed to these programs because public school debt is a popular holding across both individual bondholders and municipal bond fund shareholders," Elizabeth Foos, municipal credit analyst for Morningstar, said. "These enhancement programs provide bondholders with an additional level of security and lower the cost of financing for municipal bond issuers, yet the programs vary widely across the 28 states that offer them."
To determine the overall credit quality of State Permanent Fund Programs, Morningstar evaluated the following factors:
- Security Pledge: The legal source of the state's obligation to provide debt security to the bondholder.
- Program Procedures: How and when a state's commitment to bondholders will be put into effect.
- Pledged Revenues: The past and expected future sufficiency of a state's pledged revenue to pay debt, including an analysis of financial flexibility, investment portfolio, and guaranteed debt.
- Correlation to State Credit Quality: A determination of the relationship between the credit quality of the state credit enhancement program and the credit quality of its sponsoring state.
Morningstar rates the Security Pledge, Program Procedures, and Pledged Revenues factors on a scale of Good, Fair, and Poor. The Correlation to State Credit Quality ranges from Very High, High, Moderate, Weak and Not Correlated.
Foos added, "Our research found that State Permanent Fund Programs were among the strongest types of state credit enhancement programs. Based on our analysis, we believe the three main state programs in this category—Texas, Nevada, and Wyoming—provide a significant degree of additional security to bondholders through their strong legal security pledge, clear and efficient operating procedures, and stable financial resources."
An excerpt of Morningstar's report on State Permanent Fund Programs is available at http://global.morningstar.com/statepermanentfunds. For more information about state credit enhancement programs and the different types, please visit http://global.morningstar.com/creditenhancement. Morningstar's municipal credit research team plans to publish research reports about State Guarantee Programs, State Appropriation Programs, and State Intercept Programs later this year.
About Morningstar, Inc.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offers an extensive line of products and services for individuals, financial advisors, and institutions. Morningstar provides data on approximately 416,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 9 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its registered investment advisor subsidiaries and has approximately $149 billion in assets under advisement and management as of Dec. 31, 2012. The company has operations in 27 countries.
Morningstar, Inc. is not registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization (NRSRO); therefore its credit research and ratings are not to be viewed as a NRSRO rating. Morningstar's credit research and ratings are provided for informational purposes; they are an assessment that is subjective in nature and is derived from publically available information. Morningstar's credit research and ratings are subject to change and are not to be viewed as a guarantee.
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