Saturday March 23, 6:44 pm Eastern Time
Companies Could See Cash Squeeze -Moody's
By Jonathan Stempel
NEW YORK (Reuters) - Dozens of big companies may find themselves unable to raise cash by tapping their credit lines if their business positions worsen, credit rating agency Moody's Investors Service has warned.
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Responding to investor demand, Moody's has published reports on 236 companies, all but one with investment-grade ratings, as part of its push to have companies disclose their finances better.
Investors and Securities and Exchange Commission (SEC) Chairman Harvey Pitt have faulted Moody's and rivals Standard & Poor's and Fitch Ratings for failing to downgrade energy trader Enron Corp.(Other OTC:ENRNQ.PK - news; NYSE:ENE - news) fast enough last year as it spiraled toward bankruptcy.
``A company can be put virtually out of business if it has no access to short-term money,'' said J. Curtis Shambaugh, who retired this month as managing director and senior advisor in global credit strategy at Credit Suisse First Boston. ``The reason Enron unwound so fast is that it had no access.''
Moody's said oil field services company Halliburton Co.(NYSE:HAL - news), health insurer Humana Inc.(NYSE:HUM - news) and others could see access to cash crimped, as it was this year for telephone company Qwest Communications International Inc.(NYSE:Q - news) and conglomerate Tyco International Ltd.(NYSE:TYC - news) Qwest and Tyco were shut out of the market for short-term debt known as commercial paper and tapped $18 billion of bank credit lines.
``Liquidity has definitely dried up and made the markets gun-shy,'' said John Hoeting, a money market portfolio manager, who invests $4.5 billion for Fifth Third Investment Advisors in Cincinnati. ``Investors are trying to avoid land mines.''
Still, not all investors like the reports.
``It's foolish,'' said Robert Smith, president of Austin, Texas-based Sage Advisory Services Ltd., which invests $2 billion. ``Moody's is acting outside its role as a financial analyst that looks at financial statements and fundamentals. Its statements could turn into self-fulfilling prophecies.''
Moody's acknowledges this.
``It's often a situation that rating agencies get into that if they say too much it could cause problems, but investors we talk with and our clients have been enthusiastic about these reports,'' said David Stimpson, Moody's managing director of rating communications.
Moody's, which Monday began releasing its ``liquidity risk assessments,'' expects to release 600 reports by September.
INVESTORS CONCERNED POST-ENRON
The first reports, analyzed by Reuters, assess the cash needs and backup financing arrangements, such as the credit lines, used by at least 187 of the 236 companies.
More than 130 of the reports also contain easy-to-remember adjectives describing a company's liquidity, such as ``strong'' or ``satisfactory.'' For example, it said Ford Motor Co.'s (NYSE:F - news) finance arm, which sold $2 billion of bonds Monday, has ``solid'' liquidity.
Moody's said it has not defined the labels specifically -- ''solid'' may not be better than ``adequate,'' for example.
The rating agency also identified at least 56 companies with ``material adverse change'' clauses in credit lines, which excuse banks from lending upon such events as weakening finances or an adverse legal judgement.
Banks could enforce a handful of these clauses only upon making their initial loan. The vast majority of these clauses, though, remain a potential albatross for companies.
Even chemical giant DuPont Co. (NYSE:DD - news), with ``outstanding'' liquidity, has an environmental MAC clause, Moody's said.
Moody's said the MAC clause in Louisville, Kentucky-based Humana's $530 million of bank lines ``provides vulnerability'' in part because bankers can invoke it each time Humana, whose liquidity Moody's labeled ``sufficient,'' tries to borrow.
``We're not surprised by this,'' said Brett McIntyre, Humana's vice president and treasurer. He said Moody's expressed concern about the clause a few weeks ago, but he called it ``an industry standard clause in credit facilities, and we don't think it creates a major funding risk.''
Meanwhile, Moody's said Dallas-based Halliburton has ''solid'' near-term liquidity but faces ``significant'' risk from asbestos litigation that could lead to defaults under two credit lines. These lines also require the company to keep its investment-grade ratings, Moody's said.
``Moody's is being extremely cautious, and I can't fault them given what's happened in the market, but our liquidity remains strong,'' said Cedric Burgher, a Halliburton spokesman.
INEFFICIENCIES
Hoeting fears the reports may handcuff investors and
issuers.
``Pricing inefficiencies may develop,'' he said.
Smith worries about exogenous events, as when energy
companies Calpine Corp.(NYSE:CPN - news) and Williams Cos.(NYSE:WMB - news) had to scramble to reassure markets after Enron's collapse.
``Other fires (may damage) your ability to access cash and banks' abilities to lend,'' he added.
Yet Shambaugh, who now runs the MarketEyes Inc. investment advisory firm in Savannah, Georgia, said investors burned by Enron and the 2001 crises affecting California utilities Pacific Gas & Electric Co.(NYSE:PCG - news) and Southern California Edison(NYSE:EIX - news) can benefit from Moody's assessments.
``Investors have long felt they lacked full information,'' he said. ``Credit is a measure of belief. If you don't believe in the company, then you need these assessments desperately.'' |
