Moodys: "RATING TRIGGERS ABOUND in US corporations but most not disclosed in SEC filings"
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"EUROPEAN CORP. DEFAULTS RISING, 12 month spec-grade default rate of 12% nearly twice historical average"
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>>>RATING TRIGGERS ABOUND in US corporations but most not disclosed in SEC filings; effects factored into ratings
PRESS RELEASE
New York, July 18, 2002 -- A recent survey by Moody's Investors Service of over 1,600 US corporate debt issuers reveals that 88% of companies rated Ba1 or higher have rating triggers incorporated in their borrowing agreements, but that less than a fourth of these triggers are disclosed in the companies' SEC filings.
The majority of these "triggers" -- which stipulate mandatory changes in contract terms once a company's rating falls below a specified level or another predetermined event occurs - are relatively benign, the rating agency concludes. Such triggers dictate an increase in borrowing costs through the application of pricing grids, or call for the posting of additional collateral or the purchase of third party insurance, but do not materially increase the company's probability of default.
However, approximately 24% of all rating trigger effects uncovered in Moody's survey have potentially severe consequences, including an acceleration of payments on the company's outstanding debt, a put of an entire class of debt back to the company, or technical default.
These effects are most common among companies rated low-investment-grade (Baa level) and are generally triggered once the company falls below-investment-grade (Ba or lower), prompting a potentially swift and severe deterioration in credit quality once the company hits the "junk bond" level.
Most troubling for investors is the fact that some of the more problematic triggers are least likely to be disclosed by the affected firms in their public filings, Moody's finds.
The rating agency says that it will not disclose the particulars of any undisclosed triggers due to confidentially constraints.
"However, we will highlight, where possible, the existence of rating triggers in each issuer's financial structure, and we have factored the effects of each of these triggers into our ratings," says Pamela Stumpp, Moody's Managing Director and Chief Credit Officer for Corporate Finance.
She explains that for the riskiest class of triggers, Moody's constructs a worst-case scenario to see whether a company would have the wherewithal to make accelerated debt payments, repay certain classes of debt outright, or fulfill other obligations assuming the triggers were tripped
Investors should not expect more downgrades solely as the result of triggers, Moody's Stumpp says. But she adds that if a company were downgraded as the result of weakness in its fundamental operations or financials, that the presence of such triggers could result in the rating falling several notches at once.
"Moody's will not forebear from taking a rating action because of the potential adverse consequences of a ratings trigger," Stumpp adds.
ABOUT THE SURVEY
Moody's surveyed 1,867 US corporate debt issuers about the rating triggers contained in their on- and off-balance-sheet financial arrangements and contracts with third parties. Of these companies, 1,639 responded for a response rate of 88%. Of these respondents, 771 were issuers with debt rated Ba1 or higher and 868 were rated below Ba1.
The resulting report "Moody's Analysis of US Corporate Rating Triggers Heightens Need for Increased Disclosure" focuses on the responses of the 771 issuers rated Ba1 or higher. The report reveals that 675, or 88%, of these companies have rating triggers contained in at least one of their contracts, and most reported multiple occurrences, for a total of 2,819 triggers with 3,681 "effects".
However, the rating agency also says that because many companies that took part in the survey were not specific about their total number of triggers or the number of commercial agreements that contain such triggers, these numbers likely understate the prevalence of these clauses.
The report ranks each type of rating trigger according to its prevalence, discusses the severity of the impact of each, and explores the different types of contacts and agreements in which these triggers might be found.<<< |
