A recent discussion in Bond Buyer highlights an interesting turn by one of the leading bond rating agencies:
Moody’s Investors Service is pushing state and local issuers to agree to indemnify and hold it and its officers harmless for any mistakes they might make as a precondition to assigning ratings on municipal bond transactions, market participants said Thursday.
The recently added provision to issuer rating applications means that an issuer would have to pay Moody’s legal costs for lawsuits — as well as any judgments against it — that are in any way related to the rating of the issuer’s securities, barring only “fraud or willful misconduct” on the part of Moody’s.
Alarmed market participants said that Moody’s has quietly added the indemnity language in the past few weeks to the fine print of applications that governmental issuers must complete for ratings. The provision comes on the heels of the new financial regulatory reform law that makes it easier for investors to sue rating agencies if they “knowingly or recklessly” fail to investigate the data they rely on to rate a security.
Nearly every local government issuing bonds routinely seeks a rating from Moody’s as part of that process, both in Maryland and across the country.