Newspaper article The Evening Standard (London, England)

Debt Agencies Find It Hard to Credit Big-Name Victims

Newspaper article The Evening Standard (London, England)

Debt Agencies Find It Hard to Credit Big-Name Victims

Article excerpt


BA is among those finding out just how much power ratings analysts have, says Jane Padgham

WHAT do Railtrack, British Airways, Marconi, Procter & Gamble, Motorola and General Motors have in common? Answer: they have all recently suffered the ignominy of having their creditworthiness slashed by ratings agencies.

The immense power wielded by the agencies - particularly the big two, Standard & Poor's and Moody's - was illustrated two weeks ago by the case of British Airways. Its shares slumped more than 3% after S&P downgraded it to one notch above junk bond status.

At a stroke, S&P influenced not only the cost to British Airways of raising new debt, but also the value of the flag carrier's existing shares and bonds in the City.

S&P dates back to 1860, when it was set up to publish financial statistics on US railway companies, from which spawned corporate and government credit ratings 75 years ago. Moody's followed in 1909, with a compendium of statistics and analysis on 250 railroad bonds.

The rating process is quite straightforward. The agencies' objective is to assess the probability of a debt issuer defaulting on the repayment and interest payments of a loan.

It analyses the financial risk of the company (the stability and predictability of its future cashflow) and the business risk (how good its product is and the likelihood of the management team delivering) over the next three to five years.

Moody's breaks down these two broad categories further, providing more clues on the kinds of details it scrutinises. These include industry trends, the political and regulatory environment, the operating and competitive position, the company's structure, parent company support agreements and event risk.

It is this final wildcard, which encompasses the 11 September terroristattacks on the US and Railtrack's collapse, which have triggered the majority of recent downgrades. …

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