Credit analysts are worried that proposed changes by Moody's Investors Service to its ratings methodologies could have a negative impact on the European corporate credit market. Late last month, Moody's announced it may shorten ratings reviews, permit more responsive actions to market news, change ratings without formal review and streamline the process for establishing ratings outlooks--perhaps eliminating them altogether. Calls to Christopher Mahoney, senior managing director and chairman of Moody's credit policy committee and author of the report, were not returned.
The planned changes to the rating methodology likely will impact credit spreads in the U.S., but this will be more pronounced in the more illiquid European bond market, argues Simon Ballard, credit strategist at Bear Stearns in New York. In particular, credit spreads on European bonds rated triple-B and below likely will be more volatile because the European crossover investor base is much smaller than that in the U.S. and there are not as many high-yield investors. "I don't disagree [with the proposed changes] in principle," he comments. "There could be major repercussions."
Ballard also argues that downgrades based on market perception could prevent corporates from being able to obtain banking facilities to refinance debt, leading to bankruptcies and liquidity crunches. He cited Holland's incumbent telecom operator KPN as an example. Last year, the company's public debt traded at sub-investment grade levels, as the market had priced-in a downgrade to the junk category. If Moody's had followed the market's lead and downgraded KPN, the company, which was negotiating a bank facility to redeem debt, could have experienced an even worse liquidity squeeze.