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Politics : Ask Michael Burke -- Ignore unavailable to you. Want to Upgrade?

To: Knighty Tin who wrote (67365)	9/8/1999 1:51:00 PM
From: Freedom Fighter	Read Replies (1) \| Respond to of 132070

Mike, Do you think the rating agencies are doing an unbiased and reasonably high quality job with debt ratings or are they also influenced by many of the same pressures as Wall St. etc...? Wayne

To: Knighty Tin who wrote (67365)	9/8/1999 11:13:00 PM
From: Lymond	Read Replies (1) \| Respond to of 132070

Mike, re "The number of AAA and AA credits is down about 70% in the past 10 years." I think one thing you should consider here is the secular downward bias rating agencies have been imposing for companies at the top end of the credit spectrum. Consider the banks. In the 1980s, most were rated double-A or triple-A. The 1989-91 US banking debacle induced the agencies (especially Moody's) to aggressively lower their bank ratings . The subsequent rehabilitation of the sector led to upward revisions, but they never got back to where they were before. Downward pressure continued in previously sacrosanct names like JPM, Deutsche, et al., which clearly were shifting their business mix in favor of the more volatile securities lines. Bottom line: I think the agencies have raised the bar significantly since the 80s for companies in terms of meeting double-A or triple-A standards. Another factor is the increased willingness of heretofore top-rated companies to sacrifice double-A credit ratings to achieve strategic imperatives. After all, how much incremental benefit does having double-A or higher rating give you? Unless you're a financial institution, I think the conclusion drawn by many corporations is "not much." On the other hand, the chasm between triple-B and double-B remains quite large in terms of incremental debt cost. Most are not willing to cross this bridge, if they can help it. Happenings in the junk market are another matter, and certainly seem more in line with your general thesis. It also seems evident that in investment-grade land, the sands seem to be shifting more quickly these days for an increasing number of businesses. Moreover, the agencies have been burned so much lately (especially in the case of sovereigns), that they are being driven largely by caution. But keep in mind who pays them. It's a balance of forces -- though I do think the objective side is slowly winning. My main point is that one should be careful in extrapolating long term ratings trends in periods when the standards are changing. Regards, John