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Markets EdgePAPPY 23June 11, 20262 min readAd-free
Maryland Terminates Moody's Contract After Aa1 Downgrade, $800M Bond Sale Proceeds
First major state to sever Big Three relationship since 2008 crisis; S&P and Fitch maintain ratings.
Markets Edge deskMarkets Edge · Huang GoodmanSource: Baltimore Sun ↗
In plain words
Maryland's Moody's termination after downgrade creates first test of whether states can credibly narrow rating coverage without spread penalty.
Aa1
ending a relationship dating to the early 1980s
$800 million
bond offering now rated solely by S&
$23 billion
The firm projected the state's net pension liability ratio…
184%
of governmental revenues by fiscal 2027 without policy changes
Maryland Treasury terminated its contract with Moody's Investors Service thirteen months after the firm downgraded the state's general obligation bonds from Aaa to Aa1, ending a relationship dating to the early 1980s. The state disclosed the decision eleven days before pricing an $800 million bond offering now rated solely by S&P Global and Fitch, both of which maintain their top-tier equivalents.
Moody's downgraded Maryland in April 2025, citing structural budget pressures and unfunded pension liabilities exceeding $23 billion. The firm projected the state's net pension liability ratio would reach 184% of governmental revenues by fiscal 2027 without policy changes. Maryland Treasurer Dereck Davis said the state "no longer requires three rating agencies" and characterized the move as cost optimization, though the state paid Moody's approximately $47,000 annually under the terminated contract. S&P and Fitch did not follow Moody's downgrade, maintaining AAA and AAA equivalents respectively, creating a split-rating scenario that typically increases borrowing costs by 8-12 basis points according to Municipal Market Analytics data.
The termination matters because it tests whether sub-sovereign issuers can credibly exit the rating oligopoly without market penalty. No US state has voluntarily severed a Big Three relationship since California briefly dropped Fitch in 2009 before reversing course within eighteen months. Maryland's $21.4 billion in outstanding general obligation debt trades on $180-240 million in daily secondary volume, giving the state unusual pricing power. If the June bond sale prices inside 90 basis points over AAA benchmarks—the threshold where two-agency coverage historically matches three-agency deals—other Aa1-rated states including Illinois, New Jersey, and Connecticut gain a playbook for responding to unwelcome downgrades. The precedent becomes more significant because Moody's maintains a negative outlook on nineteen US states, the highest count since 2013, suggesting more downgrade friction ahead.
Allocators should monitor whether Maryland's June pricing clears inside 90 bps over the MMD AAA scale, the empirical spread where institutional buyers historically ignore single-agency absences. Watch for Illinois Treasurer response within 60-90 days; Illinois carries a Baa1 Moody's rating versus A-minus from S&P and Fitch, creating the widest rating gap among states and the strongest political incentive to replicate Maryland's move. Fitch and S&P analyst commentary in the next 30 days will signal whether the remaining agencies view Maryland's action as credit-negative governance or operationally neutral; any suggestion of retaliation downgrades would freeze the strategy's replicability. Secondary market spreads on Maryland's 2034 and 2038 maturities, currently trading 72 and 81 bps over MMD, provide real-time referendum on investor comfort with two-agency coverage.
The June deal prices the week of June 9th. Moody's has not publicly commented on the termination, but the firm's municipal revenue from state and local contracts declined 11% year-over-year in Q1 2026, before Maryland's decision.
Branded by POPS4 · proof in 60 seconds
For the principal
If Maryland prices inside 90bps, the playbook exists to pressure unwelcome rating agencies—material for any state with split ratings.
For the operator
June 9th Maryland deal tests two-agency sufficiency; spreads inside 90bps over MMD validate strategy, outside 100bps kills replicability for year.
For the house
Huang Goodman Municipal desk shorting Maryland 2034s into the deal; exit if pricing clears tight, double position if spread blows.
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