Moody’s may change the way it rates companies

NEW YORK, JANUARY 19: RESPONDING to severe market criticism, Moody’s Investors Service said it was considering making changes in how it rates companies.

The changes, which Moody’s said it should be ready to discuss in a few weeks, could cause ratings to rise or fall faster, affecting companies’ ability to raise money and, in some cases, to do business.

The review by one of the three leading US credit rating agencies — the others being Standard & Poor’s (S&P’s) and Fitch — follows criticism of the agencies’ perceived lack of speed in downgrading troubled energy trader Enron Corp.’s ratings to junk status in November.

‘‘We are considering a number of measures to improve the timeliness of rating actions, in response to criticism from the market about that timeliness,’’ said Debra Perry, Moody’s senior managing director in corporate and public finance.

She said Moody’s was preparing a ‘special comment’ on the matter that should be issued ‘in a few weeks.’ She did not cite criticism of any specific rating activity as having precipitated the review.
Perry said the changes could include more multi-notchup grades or downgrades of company ratings; a speeding up of rating reviews ‘into a matter of weeks, rather than a few months;’ and perhaps the elimination of rating outlooks.

‘‘There is a school of thought within Moody’s that our ratings are too ‘sticky,’ or move too slowly, to reflect our true opinions about companies’ risks,’’ she said. ‘‘Some people in Moody’s argue we should accept greater volatility in order to improve the predictive power of ratings, and we understand that could be controversial among market participants. We don’t intend any fundamental changes in policy without having first gone through a significant amount of market dialogue.’’

A rise in negative rating actions would depress bond prices and leave many companies facing higher funding costs or more difficulty in raising money, especially as the US economy wades through recession.

Following Enron’s unraveling, Arthur Levitt, former chairman of the Securities and Exchange Commission (SEC), wrote in The New York Times that rating agencies have ‘quasi-public responsibilities’ and ‘should show greater accountability.’

Earlier this week, S&P And Fitch told Reuters that since the Enron blow-up, they have in their rating activity begun focusing more on liquidity, or the ability of companies to access the cash they need to run their businesses.

Analysts have said that all three agencies — which companies pay for ratings, needed to sell securities — have been particularly aggressive downgrading ailing discount retailer Kmart Corp.’s ratings to low ‘junk’ grades.

A policy shift ‘‘could have the effect of making it more difficult for (borderline) credits to survive an economic downturn,’’ said CreditSights Inc., a New York-based fixed-income research service, in a report.

‘‘If Moody’s moves ahead with these changes,’’ it added, ‘‘it would mark a major structural change in the corporate bond market that could lead to structurally higher volatility.’’ (Reuters)