Muni State of States According to Atlas Credit Scores


How the overall muni credit scores stack up against each other

Chicago, IL, October 20, 2014
With over 40,000 obligors in the muni marketplace, it is always hard to get a good understanding of the overall credit quality of each obligor. Now investors have a new tool through Atlas Credit Score provided by Atlas Investment Research. Atlas Credit Score is a single quantitative based, unbiased credit analysis tool for 30,000 obligors. It is based on rigorous, bottom-up approach that uses 2 credit factor groups including local micro-economic factors and obligor financial health factors. 24 individual credit factors are used.

Quadrant Analysis

In its final form, each obligor has a final score. This final score is derived from two factor group scores.
Each factor group score is in turn derived from 12 factors respectively. Factor Group #1 includes micro-economic factors such as population change, unemployment rate, household income, poverty rate, housing vacancy rate, housing value, and so on. Factor Group #2 includes Atlas Investment Research’s proprietary debt/demographic ratios such as debt per capita, debt/per capita income ratio, debt/housing value ratio, and so on. The final score and the two factor group scores are scale from 1 to 10.
In the chart to the right, we divided the space into four quadrants by drawing the middle line between group score 5 and 6 on both factor group axes. Quadrant #1 states face headwind in both micro-economic and financial health dimensions. Quadrant #2 states face micro-economic difficulties, but they are doing a good job managing their finances, so overall they are doing ok. Quadrant #3 states have everything going right for them. Quadrant #4 states have financial challenges, but micro-economically wise they are doing fine. Therefore, we named Quadrant #1 “Challenging”, #2 “Prudent”, #3 “Solid” and #4 “Emerging”.
According to this methodology, we have the following distribution for the 50 states as well as Puerto Rico.
The list of all three scores and quadrant location of all 50 states plus Puerto Rico are in Appendix I. South Dakota and Wyoming are not included in the list since these two states do not have direct issue debt outstanding at this time.

Discussions and Implications

Even though there are 9 states in Quadrant #1 – Challenging, Puerto Rico is really in a class of its own with the only state having the final credit score of 1. Neither micro-economic nor financial factors are working in its favor. It is then quite understandable that the market demands very high yields on its debts. The rest of the states in this quadrant are in considerably better shape, even for problem states like Mississippi, Ohio and Illinois as they have a total score of 4.
Quadrant #2 – Prudent states have microeconomic head winds, but for the most part they spend the money they have. The best example is Michigan. With a very low microeconomic score of 3, they steered their financials to a solid score of 6, giving them a final score of 4. This is quite remarkable. This same behavior enabled states like Indiana and Maine to achieve respectable overall health of 7.
Quadrant #3 – Solid states are doing just fine. New Mexico and Alabama are equally careful with decent but not spectacular microeconomic and financial factors. Iowa, Montana, Vermont and North Dakota, on the other hand, are running full speed on all cylinders.
Quadrant #4 – Emerging states have decent to very good microeconomic tail wind but face different degrees of challenges on the financial front. That’s the reason why 6 out of 14 states, Massachusetts, West Virginia, Louisiana, Arkansas, Washington and Hawaii, have a borderline final credit score of 5.
In summary, the single final score, with all the sophisticated information wrapped in it, is already very informative for investors. Coupled with the factor group scores, anyone can proceed with their investment decisions with even more confidence.

Appendix I

List of factor group and final scores for all 50 states.
Atlas: Muni Investment Research Specialist