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To: Larry S. who wrote (47910)	4/28/2003 4:00:32 PM
From: Larry S.	Respond to of 53068

Important story, imo, on rating agencies and bond ratings: Junking Up The Market Richard Lehmann, Forbes/Lehmann Income Securities Investor, 04.28.03, 2:45 PM ET Congress is on the warpath against credit-rating agencies, precipitated in no small part by the meltdowns of investment-grade-rated issuers like Enron and Worldcom. The focus of current hearings seems to be what government should do. Criticism seems to be centering on the notion that rating agencies have not been aggressive enough in downgrading miscreants. Nothing could be farther from the truth. Rather than hold hearings on why rating agencies aren't tougher, Congress needs to address a greater problem. We need to identify what is causing credit agencies to rate over half the bond issuers in the country as "junk" and what are the long-term economic effects. The very definition of what constitutes "investment grade" should be debated. Some seem to think ratings measure a company's ability to repay its debt. However, a growing company need never repay its debts and in many cases a healthy growing company may be more likely to increase its leverage. Hence, what credit-rating agencies should be measuring is the ability of a company to service its existing debt load. That is not what I see happening. The credit analysts at bond-rating agencies behaving more like stock analysts--perhaps in an attempt to gain share from beleaguered Wall Street firms. It is my belief that this is the primary reason for the wholesale downgrading of corporate America. Standard & Poor's and Moody's have become focused on reflecting a company's prospects rather than its ability to service the debt. As a result, a negative rating action can actually jeopardize a company's ability to refinance its debts, or at least its ability to refinance them with reasonable terms and at fair rates. The recent downgrading of utilities and energy companies in the wake of Enron has led to numerous companies being downgraded to junk status by the rating agencies who seemed to feel these companies would have difficulty refinancing their bank debt. Should credit agencies be second-guessing banks on their lending practices? In this case, the rating agencies are way off base. Can you think of an industry banks would rather lend to than utilities? That's one reason I have been buying up the high-yield convertible preferreds of downgraded and distressed energy companies like TXU Energy (nyse: TXU), the largest electricity retailer in Texas, and natural-gas provider El Paso Energy (nyse: EPN). These credits have been punished despite their strong business prospects and relatively solid financial positions sheets. They remain a bargain. Get a jump on which stocks the top investment advisers are buying and selling by signing up for Forbes' FREE Investment Guru Weekly E-Mail Congress should know the problem is not the one they perceive and that they are sending the wrong message to the rating agencies. The losers here have been the original investors in these companies. However, the toll is even greater when one considers the effect overzealous ratings agencies have had on the economy, which is suffering from reduced capital expenditures because companies are burdened with ratings that make raising capital for growth too expensive to justify. Congress and the SEC would help investors if they reigned in these raters by clearly defining the distinction between rating credits and analyzing equity before firms like Moody's and S&P do any more damage. forbes.com