Moody's Investors Service has decided not to implement ratings transitions for investment-grade issuers that are subject to event risk. In July, Moody's published a proposal for ratings transitions for investment-grade issuers that, after a "transforming event," could be downgraded to speculative grade. Such events could include a substantial stock buyback, accepting a leveraged buyout offer or spinning off a material business (CIN, 7/21).
But after receiving more than 50 responses during a one-month comment period, in which about 60% of respondents argued against adopting the change, Moody's has decided to continue with its existing practice.
Dan Gates, managing director and chief credit officer for corporate finance in the Americas, said that once feedback in the market was pretty clear the market valued ratings stability, it decided not to make a change. "The market places a strong importance on not having ratings reversals, especially from investment grade to speculative grade where impacts can be more substantial," he said.
Investors also appreciate ratings stability because changes can have consequences, due to ratings-based portfolio governance rules, that can be costly to reverse. Moody's current practice placing companies facing credit events on watch and publishing guidance as to expected rating outcome will continue.
"If we see a leveraged acquisition or an LBO and we believe that the ratings will have a multi-notch downgrade if [the transaction] goes ahead, we'll try to declare to the market...what we think the potential drop in the ratings will be [when it goes under review]."
The ratings agency has used ratings transitions in the past for larger deals, such SunGard Data Systems, SUPERVALU and Albertson's, but wanted to clarify the practice, thus leading to the proposal. The idea was that in situations where additional leverage and debt were added to a company's books, the ratings agency would transition ratings through a series of interim ratings actions as opposed to a significant one-off, multi-notch ratings adjustment following an event (7/21).