• Create BookmarkCreate Bookmark
  • Create Note or TagCreate Note or Tag
  • PrintPrint
Share this Page URL
Help

Chapter 10. Beyond Their Means: Balance ... > Red Flag 4: A Rating Downgrade Trigg...

Red Flag 4: A Rating Downgrade Triggers Obligations, Such As Debt Repayments

A survey by Moody’s of 771 U.S. companies with a rating of Ba1 or higher showed that 88 percent of them have triggers based on their ratings incorporated into their borrowing agreements, yet less than a quarter of these triggers are publicly disclosed in financial statements. Altogether, these companies had 2,819 triggers, with 41 companies reporting 10 or more, and Moody’s said the figures were almost certainly understated. Results of the survey, which were released in July 2002, show how investors are kept in the dark over such triggers, which usually stipulate mandatory changes in contract terms once a rating drops below a certain level. While many of the triggers are benign, Moody’s said that a significant number have potentially severe consequences, including the acceleration of payments on a company’s debt, a technical default on its debt, or permission for the lender to demand the company repurchase the debt. “Such triggers exacerbate liquidity strains at the precise moment when an issuer is least able to deal with such problems,” Moody’s said in the report. The rating agency said it will seek, where it can, to highlight the existence of such triggers in the future.


PREVIEW

                                                                          

Not a subscriber?

Start A Free Trial


  
  • Creative Edge
  • Create BookmarkCreate Bookmark
  • Create Note or TagCreate Note or Tag
  • PrintPrint