Treasurers’ (and market/Congressional) view of the relevance of the credit rating agencies has plummeted substantially as triple-A ratings proved hollow. Once again, as in Enron days, the market spreads were more telling than the agencies’ models on assessing the risk embedded in SIVs and other structures.
But that does not mean credit ratings will disappear: (1) they drive the “inclusion of companies in indices and thus the investment strategies (by policy) of various institutional buyers,” according to Allen Cutler, managing director with Lehman Brothers; and (2) investors still see them as a pre requisite, in particular for new or infrequent issues.
“The rating agencies are under tremendous pressure,” said the SVP and treasurer of one large MNC. But the markets, meanwhile, have not been pricing new debt deals based on the agencies; calls. This company, in the Bs, was able to issue debt and the cost was not rating-driven but market-driven.
That said, to give agencies their due, several treasurers noted Moody’s in particular has come a long way in providing transparency into its ratings, even when it diverges.
NEW LANGUAGE FOCUS
If anything, the one deal-breaker was whether the debt deal included “change of control” language. “It was not that this affected the price,” the treasurer explained. “They told us they won’t buy it at any price, were we not to include it.” That said, he and other treasurers and bankers agreed that the focus on change of control and step-up clauses often reflects the nature of the issuer (not its credit). Infrequent issuers are under greater pressure to include the language. “Since we may not be in the market for another seven or eight years, “ this treasurer said, “investors had less comfort.”
According to another treasurer: “The world has really changed as it relates to the credit rating agencies. While they have the credit analysts (and have an inside view into the company), treasurers were emphatic that many buyside firms, e.g., PIMCO, produce as good or better ratings, which are now given even more credence in the marketplace.
Still, rating agencies continue to play a vital role, even (and perhaps even more so) when the markets are reeling. One company that was working on a debt issue pre-summer felt that while painful, “this was certainly worth the money,” said the treasurer. The agency gave the company three scenarios of how its ratings would be affected depending on how it structured the debt and related buyback.
THE ROLE OF THE INFO PROVIDER
More fundamentally, noted Larry Wieseneck, a managing director with Lehman, what’s going to change over the next couple of years will be a shift in how the market interprets the “role of the information agent.”
How that agent will influence pricing, for example, may change as well as what or who are the trusted sources. Until then, practitioners agree, the market for securitized products will be hampered by concerns about the quality of the data.