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April 26, 2021

Smith's Research & Gradings

A Conversation with Moody's Lenny Jones

A Conversation with Moody's Lenny Jones

Lenny Jones' voice is becoming important to hear in the municipal market. And, we wanted to make sure that he had the opportunity to make that crystal clear to our readership, which is mostly institutional investors.

Smith's said: "Thank you for giving us the chance to talk. So you went to Stanford?"

"Yes, I went to business school at Stanford, quite awhile ago." Mr. Jones said. "I actually grew up in Newark, NJ. I went to undergraduate school at Dartmouth College. After graduation, I spent a couple of years working in the credit development program at Chase Manhattan Bank and from there I continued to work in the bank's international department. And then I went to the Stanford Graduate School of Business, where I learned there was this finance business where they took political considerations into effect. My thought was, that made it much more interesting than straight corporate finance. And so, I wanted to go into public finance when I got out of Stanford, which is why I went to Smith Barney as a public finance investment banker."

After spending two or three years in New York learning the ropes, he moved to Chicago. It was a smaller office, but he got a bigger role in structuring and began to get new business in the Chicago area. Morgan Stanley lured him away to again work in public finance investment banking and so, Mr. Jones moved back to New York. "It was fairly interesting when I was there," he added, "It was the early 90s."

South Africa
"So, Nelson Mandela was getting out of  jail at Robben Island. He was going to be President of South Africa. I was young, in my 30s, and had been involved in financing infrastructure my whole career. Morgan Stanley opened an office in Johannesburg. And I said, 'Well, I know how to finance infrastructure. That's what Mandela wants to build — water, sewer, roads, etc.' So I asked Morgan Stanley to send me there. And they laughed at me and told me they thought that South Africa wouldn't survive," he said. "Morgan Stanley thought there would be a civil war, but they were just opening an office just in case to keep their eyes on things. And I was so excited I decided to go to South Africa and I figured out how to get there on my own."

Today, Leonard Jones is a Managing Director in Moody's Public Finance Group (USPFG) and is co-manager of local government ratings in the US. He is responsible for managing the New York, Boston, Dallas, and San Francisco based local governments ratings teams. Mr. Jones also leads Moody's PFG efforts on cybersecurity and ESG issues as well as charter school ratings within USPFG.

Prior to joining Moody's, Lenny was a Partner at Rice Financial Products Company, where he managed Rice Financials investment banking business and specialized in public infrastructure finance. He was also a Senior Consultant at ABT Associates, Chief Consultant to the Zambia Privatization Agency, Vice President at Morgan Stanley & Co., Inc., Vice President at Smith Barney, Harris Upham & Co. and Assistant Treasurer in the International Department of Chase Manhattan Bank.

"I spent most of my career in public finance banking as an underwriter. I was a swap banker for a while and set up underwriting groups. And so when the Moody's opportunity opened up I decided that it would be interesting to look at this market from a rating agency perspective."

It was not too long after the financial crisis and Moody's thought it might be a little too insular. Moody's said they were looking for opinions from people who didn't grow up at the rating agency. Mr. Jones thought his contributions could have an outsized effect which made Moody's an attractive opportunity. He moved over to Moody's almost six years ago.

K-12 Methodology Changes
Moody's recently developed a new K-12 school district methodology. Previously, Moody's always kept track of the data and informed itself as to what was happening from a credit perspective for K-12 school districts. "We'd always looked at school districts through our cities and counties methodology. We began noticing there were different drivers between school districts and municipal governments. And we really wanted to have a better analysis of the sector for investors, to be more granular about the variables that truly affect school districts much differently from cities and counties," Mr. Jones said.

The process led to Moody's creating a new methodology and stripping K-12 out of the cities and counties methodology. For example, Moody's started noticing that in cities and counties, the size of the local tax base matters. But, the size of the tax base doesn't really matter as much for school districts. Moody's thought that issue could be adjusted in the new methodology because school districts normally receive money based on enrollment, with the tax base a secondary matter.

"There are some very wealthy economies where people are older," Mr. Jones said. "They're further along in their career but don't have kids in the school district anymore. Not surprisingly, the enrollment is going down in those schools. And since most schools are funded statewide, not by a local government, we thought that it would be a better metric to look at the actual enrollment for schools as opposed to looking at the economy overall."

Smith's said, "When you talk about it, this makes so much sense. Before Moody's methodology change everyone just kept going along using that same old approach. 'It's the way we have always done it.' That's the thing, isn't it? Now we see this is a better way of doing it. But for the longest time, the muni market was so confident that it had a good peg on the credit quality. And it's just a revelation, it's one of those moments you wake up and say, 'Okay, wow, this is amazing.' We should have been doing this before, maybe, but couldn't manage this change. You've done it so that people can accept it. So many times when people attempt doing stuff like this, there can be major disruption. And this has been fairly seamless. I'll say the new methodology has been embraced by the institutional investors."

Mr. Jones said, "We've updated the process for developing new rating methodologies, and that's what has enabled us to make this change in this manner. Moody's has changed substantially from the time I first got here six years ago to now, partly because of the financial crisis."

"There has been a deeper view into the rating agencies, from regulatory agencies such as the SEC in the U.S. and from regulators over in Europe. Moody's responded in a very appropriate way by looking internally, making sure that ratings were done in a manner that brings the most up-to-date and relevant information to investors.

"Moody's Investors Service has restructured itself. There are a couple of new groups that were formed right after I got to Moody's. They really focused on our methodology development and methodology review. We have people who review them on a consistent basis, just to make sure we're providing the most transparent ratings analysis and the most accurate ratings that we can.

"We have also started doing this with environmental, social, and governance issues (ESG)," Mr. Jones said. "We always considered them in our ratings, but we weren't quite as transparent as to how we analyze them. Moody's executive leadership team wanted to implement this change, but we learned that to do it required a shift in how we implemented changes. Before, you needed to form a taskforce to look at it, then get the team leaders to agree to it. Get the managing directors to agree, and then the ELT to sign off. That could take years and all the variables have shifted and you'd have to rejigger it to make it work.

"Moody's new way of implementing new rating methodologies and new rating considerations is a much more agile approach to project management. We have a new design center set up where all different approval levels are there at the beginning. Different teams are responsible for monitoring external and internal developments that could impact ratings, coming up with plans, and getting everybody to approve as you proceed. The different stakeholders are all there, you meet regularly, and important changes are made over a much shorter time period. So things that may have taken years to implement before, now take months. That's how we've been able to get these heavy lifts  like new K-12 methodologies and ESG issues done, and it's really satisfying to see how it has worked. We had 3,000 School District ratings, and it would have taken us years to do this the old way. I'm glad to hear you think it's gone fairly seamlessly. But it was a lot of work that we were able to get done in this new agile framework that we use. And it's something we're using firm-wide more and more going forward."

Smith's said, "We think this is a great demonstration of this new agile approach. And it's a great success."

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