Rediff Logo
Money
Line
Channels: Astrology | Broadband | Contests | E-cards | Money | Movies | Romance | Search | Women
Partner Channels: Auctions | Health | Home & Decor | IT Education | Jobs | Matrimonial | Travel
Line
Home > Money > Reuters > Report
December 8, 2001
Feedback  
  Money Matters

 -  'Investment
 -  Business Headlines
 -  Corporate Headlines
 -  Business Special
 -  Columns
 -  IPO Center
 -  Message Boards
 -  Mutual Funds
 -  Personal Finance
 -  Stocks
 -  Tutorials
 -  Search rediff

    
      



  Call India
   Direct Service

 • Save upto 60% over
    AT&T, MCI
 • Rates 29.9¢/min
   Select Cities



   Prepaid Cards

 • Mumbai 24¢/min
 • Chennai 33¢/min
 • Other Cities




 India Abroad
Weekly Newspaper

  In-depth news

  Community Focus

  16 Page Magazine
For 4 free issues
Click here!

 
Reuters
 Search the Internet
         Tips
 Sites: Finance, Investment
E-Mail this report to a friend
Print this page Best Printed on  HP Laserjets

Rating firms toughen review of triggers, post-Enron

The three top US credit rating agencies said on Friday they are now more likely to downgrade debt of companies with contractual obligations that could lead to big problems such as default, if their credit ratings were ever to fall.

"Rating triggers," such as one that could have forced now bankrupt energy trader Enron Corp to immediately pay off a $690 million note, are clauses in debt agreements or contracts that increase a company's obligations if an agency cuts a company's debt, typically to "junk" status.

The agencies monitor the triggers they know about, but do not establish the triggers themselves.

The new, closer scrutiny of these triggers by Moody's Investors Service, Standard & Poor's and Fitch could cause debt ratings of companies, and in particular less creditworthy ones, to fall, and borrowing costs to rise. This is especially true when a company may default or be forced to pay off debt fast.

The increased rating agency scrutiny "definitely could result in downward rating pressure," said Pamela Stumpp, chief credit officer in Moody's corporate finance group.

"The mere presence of a trigger could result in downward pressure depending on the severity of the trigger, the underlying facts and circumstances surrounding the credit, and the rating of the issuer," she said.

Houston-based Enron shocked financial markets on November 19 when it said in a securities filing that a recent S&P downgrade of its senior debt to "BBB-minus," one notch above junk status, could trigger an "acceleration clause" in the $690 million note, forcing Enron to pay back the principal in eight days.

FINANCIAL STRESS

This disclosure, and several others, caused investor confidence in the one-time No. 7 Fortune 500 company to vanish. Within two weeks, crosstown rival Dynegy Inc. abandoned its merger with Enron, and Enron filed to reorganise in the largest ever US corporate bankruptcy.

"Enron is an example of the downside of these triggers -- that they usually occur when the company is under financial stress," said Cliff Griep, S&P's chief credit officer. "Now that Enron is on everyone's mind, more scrutiny of the triggers is appropriate. There probably needs to be better disclosure in the companies' financials."

Fitch is also casting a warier eye on triggers.

"I wouldn't call what we're doing now, after Enron, a change, but I would call it a much more heightened awareness," said Nancy Stroker, group managing director of corporate finance.

"We're going to be much more actively questioning issuers," she continued. "We are also now taking a harsher look at confidence-sensitive companies that fund in capital markets. The market is now much more sensitive to liquidity concerns, and we have to reflect that in our analysis."

FLAT-FOOTED

Many market participants charged the agencies with being lax to downgrade Enron to junk status, though they, like others, may have been caught flat-footed by Enron. All of the agencies have said they made their cuts once it became clear Enron was no longer an investment-grade credit.

Moody's said Enron's rating trigger wasn't the only one to disrupt a big company.

It said triggers have also hurt the credits of California's largest utilities, PG&E Corp unit Pacific Gas & Electric Co, Edison International unit Southern California Edison, as well as copier maker Xerox Corp. Pacific Gas filed for bankruptcy protection in April.

Stumpp said triggers may have "unintended consequences" that affect a wide range of creditors. As a result, she said Moody's will assume a "worst-case scenario," especially when triggers can result in a "mutually assured destruction" for borrowers and lenders.

In this scenario, she warned, "all parties may not behave in a rational fashion."

ALSO READ:
The Enron Saga

Back to top
(c) Copyright 2000 Reuters Limited. All rights reserved. Republication or redistribution of Reuters content, including by framing or similar means, is expressly prohibited without the prior written consent of Reuters. Reuters shall not be liable for any errors or delays in the content, or for any actions taken in reliance thereon.

Tell us what you think of this report

ADVERTISEMENT