'Triple-A': How the Mighty Have Fallen
By Jonathan Stempel
Saturday July 27, 9:21 pm Eastern Time
Reuters Business Report
NEW YORK (Reuters) - Standard & Poor's decision on Thursday to strip Bristol-Myers Squibb Co.(NYSE:BMY - News) of its "triple-A" rating highlights how the sputtering economy and more aggressive corporate strategies have made the most pristine of credit ratings increasingly rare.
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Just eight U.S. companies still enjoy "triple-A" ratings from S&P and Moody's Investors Service, two leading credit rating agencies. That's down dramatically from two decades ago, when Moody's rated 58 companies "triple-A" and S&P 25, including AT&T Corp.(NYSE:T - News) and Kellogg Co.(NYSE:K - News)
The drop is emblematic of a broader corporate credit crisis that in the last year has stung investors in such companies as cable TV operator Adelphia Communications Corp.(Other OTC:ADELQ.PK - News), energy trader Enron Corp.(Other OTC:ENRNQ.PK - News) and phone company WorldCom Inc.(Nasdaq:WCOEQ - News) and soured many investors on corporate debt.
"Investor sentiment is terrible," said Stephen Mahoney, who invests $4 billion for Glenmede Trust Co. in Philadelphia. "People are scared of buying corporate (bonds) regardless of rating. Being 'triple-A' rated doesn't have a significant impact in this market."
COMPANIES WEAKEN BALANCE SHEETS
S&P this week attributed the drop over time in "triple-A" companies to rising investor risk tolerance, and companies' sacrificing their balance sheets for shareholder returns.
The eight companies still rated "triple-A" are all industry leaders, often with household names. They are: insurer American International Group Inc.(NYSE:AIG - News); Warren Buffett's Berkshire Hathaway Inc.(NYSE:BRKa - News); oil giant Exxon Mobil Corp.(NYSE:XOM - News); conglomerate General Electric Co.(NYSE:GE - News); drug giants Johnson & Johnson(NYSE:JNJ - News), Merck & Co.(NYSE:MRK - News) and Pfizer Inc.(NYSE:PFE - News); and package deliverer United Parcel Service Inc.(NYSE:UPS - News)
Diane Vazza, S&P's head of global fixed-income research, said "prudence in maintaining credit quality is very important, but credit ratings should not be an arbitrary constraint on business. It is more appropriate for a company to operate for the good of the business and let the rating follow."
A "triple-A" rating isn't meaningful when it is time to borrow. A typical "triple-A" bond yields 0.1 to 0.3 percentage point less than a "double-A" bond, Reuters data show.
Some yield more. The five-year notes that "double-A" retail giant Wal-Mart Stores Inc.(NYSE:WMT - News) sold this month now yield 4 percent, while GE's General Electric Capital Corp. finance arm's five-year notes yield 4.44 percent.
Vazza said "there are fewer than 30 'double-A' companies, so you're still talking about an elite rating class. The definitional difference between 'double-A' and 'triple-A' is (also) very small -- 'double-A' means very strong ability to repay debt, while 'triple-A' means extremely strong."
TOOTHPASTE, NOT TRIPLE-A, IN VOGUE
Despite that, several "triple-A" companies have struggled this year.
In July, Johnson & Johnson and Merck were forced to defend their accounting practices, and Merck had to scrap a public offering of its Medco Health Solutions Inc. pharmacy unit.
Earlier this year, bond fund giant Bill Gross blasted GE Capital for selling too much short-term debt and Moody's said GE Capital lacked enough bank credit lines to back up the debt. GE Capital later added more credit lines and cut short-term debt.
On Friday, GE said it will split GE Capital in four and announced the departure of the unit's chief executive.
Bristol-Myers, for its part, lagged in developing new products and may have encouraged wholesalers to overstock its products, inflating the company's revenue, analysts have said.
The average U.S. "triple-A" stock, including Bristol-Myers, has fallen 21.5 percent this year, not far below the 25.7 percent drop in the Standard & Poor's 500 index.
Glenmede Trust's Mahoney, who owns GE, Merck and Pfizer bonds, said he is now seeking high-yielding high "single-A" and low "double-A" companies that may be upgraded.
He likes Wal-Mart because "people who have lost huge amounts of money in the stock market may now want to save a buck." He also favors "double-A" rated Procter & Gamble Co. (NYSE:PG - News), reasoning that if the economy weakens or more corporate shenanigans emerge, "people are still going to have to buy toothpaste and soap." |
