Moody's Investors Service came out with a proposal last week for ratings transitions for investment-grade issuers that, after a "transforming event," could be downgraded to speculative grade. These events could include a substantial stock buyback, accepting a leveraged buyout offer or spinning off a material business to shareholders.
The ratings agency has used ratings transitions in the past for Albertson's and SUPERVALU, and for SunGard Data Systems, but Pamela Stumpp, an author of the report, said it wanted to clarify the practice to the market. "There has been a step up of this type of activity in the last 12 months and we wanted to be transparent about our approach," she said.
In situations where additional leverage and debt are added to a company's books, Moody's proposes transitioning ratings through a series of interim ratings actions as opposed to a significant one-off, multi-notch rating adjustment after an event. The progression of these adjustments will be based on the expected degree of change from the current rating to the new rating, and Moody's assessment of the probability the event will occur. The ratings agency said it recognizes a particular ratings action might be reversed if the transaction does not consummate, but the likelihood of a reversal taking place at the cross-over point is small.
Moody's will consider various factors in positioning the rating along a transition timetable. First, the nature of the transaction, whether it's a leveraged buyout or a company-initiated activity; second, what the rating will most likely be after the event is completed and how large the jump will be; and finally, the transaction time line and the protection provided by the terms of indentures covering the specific securities.
Moody's is accepting feedback, globally, until August 18. Stumpp said Moody's will evaluate the feedback it receives before it formalizes its methodology.