Free Muni Rating Program Released

A New York City company released a free municipal bond rating computer program Wednesday.

The program’s primary purpose is to calculate the probability of default on bonds. It is geared to evaluating general obligation municipal bonds, Treasuries, and foreign sovereign and sub-sovereign bonds.

“It relies on a multi-year budget simulation that estimates annual default probabilities based on the likelihood of exceeding a user-specified fiscal threshold in any given year,” according to the company releasing the program, PF2 Securities Evaluations Inc.

The program can also be used to derive letter ratings similar to those provided by existing ratings agencies. “To me the letter rating aspect is more of a convenience,” said Marc Joffe, who came up with the idea for the program and is a consultant to PF2. “I think people should focus on default probability.”

To use the program one normally needs to have available government projections of revenues and expenditures. The program, named the Public Sector Credit Framework, primarily uses quantitative assumptions that users input. It has more than one way to account for the impact of possible shifts in government policy on the likelihood of default.

The program uses economic as well as fiscal projections.

“Since PSCF models make all of an analyst’s assumptions plainly visible, the approach combats bias,” Joffe wrote.

The program is not only free but open source. “Programmers and analysts can review the tool’s source code and adapt it to fit their needs,” PF2 wrote.

It has been tested in a Windows 7 environment with Microsoft Excel 2007 and 2009. The program should run on earlier versions of Windows and Excel, Joffe wrote.

While the program can be downloaded for free from http://www.publicsectorcredit.org/pscf.html, PF2 hopes to make money from it. It hopes that sophisticated investors will come to PF2 to use the program to evaluate their bond portfolio for risk or to evaluate possible future bond purchases for risk, Joffe said. PF2 would charge for the service.

The source code for the program has been posted to GitHub, a popular open source depository, at https://github.com/joffemd/pscf.

PF2 also has sample models for the U.S. and California governments at the publicsectorcredit.org site mentioned above.

For more information readers can contact Joffe at marc.joffe@pf2se.com.

Responding to the introduction of the program, a Standard & Poor’s spokesman said, “We welcome competition because the market benefits from a diversity of opinions on credit risk that are independent, transparent and comparable across asset classes and geographies.”