Pity the ratings agencies. Vilified in some quarters more often than the average cricket umpire for their judgments, some of their recent pronouncements on the telecoms sector, in particular, have made them less than popular in scores of boardrooms.
No wonder. When Moody's slashed its rating on British Telecom by two notches in May (S&P's downgrade was by a less damaging single notch), it triggered a coupon step-up clause on a recent bond issue. When a company has just done something that is going to cost an estimated [pound]30m (E50m) or so in annual interest charges, it hardly propels it to the top of the Christmas card list.
The consolation for the ratings agencies is that they appear to have a surprisingly high degree of support from credit analysts for the downgrades they have made over the past year. One says that he has little sympathy for BT, and that although it would be convenient for everybody to lay the blame for spread widening at the door of the ratings agencies, it is not their fault that equity markets have been so unaccommodating towards the refinancing plans of the telecoms companies.
Nor is it the ratings agencies' fault that UMTS licences cost as much as they did. Nor is it their fault that the telecoms sector over-stretched itself so extensively with debt. Nor, perhaps most important, is it their fault that so many new bond issues now incorporate coupon step-up clauses that are triggered when the agencies do their job - which is not to sit in judgement on companies, but merely to give an indication of the likelihood of default, which is a very different thing.
As the same credit analyst points put, telecoms companies have used coupon step-up clauses as a very effective way of accessing a market that might not otherwise have been open to them at anything like the pricing levels they have been commanding. Against that background, it is hardly fair for those companies to turn round and blame the ratings agencies when those clauses are triggered. To do so would appear to be a classic case of bad workmen blaming perfectly efficient tools.
Sympathy for the agencies also comes from Joe Cantwell, whose US-based company, Cantwell & Company, has been advising companies on ratings for the past 20 years. He says: "I spend a lot of time working with corporates and helping them to manage their ratings, and frankly, I don't have a lot of sympathy with a company that is active in the bond market but gets annoyed when an agency initiates coverage or changes a rating. It's part of the drill that if you're going to tap the international capital market you have to expect to be rated."
Nevertheless, Cantwell's most recent survey on companies' attitudes towards the agencies (published last year) found that 53% of respondents - perhaps not surprisingly - reckoned their ratings were either "too low" or "much too low".
It seems improbable in the extreme that this year's survey, due out in a couple of months, will show companies to be any more satisfied with agencies than they have been in the past. "I think companies in general are probably less happy with the agencies because we continue to see downgrades significantly outnumber upgrades, which is natural, given that the operating results of the corporate sector have fallen off so heavily, especially in the telecoms sector," says Cantwell.
For their part, the agencies say that the bare facts do not support the contention that their performance on assessing the likelihood of default has been poor. At Fitch in London, which is increasingly challenging the traditional duopoly of Moody's and Standard & Poor's, Paul Taylor, group managing director, says that in this respect the agencies' track record has stacked up well enough. "Three years ago we were wrong about Asia and we threw our hands up and admitted it. But if you look at our track record we generally get things right. …