Moody’s Investor Services isn’t taking any chances.
Along with other major credit rating firms, like Fitch and the venerable Standard & Poors, it has been excoriated for misjudging the risk associated with many speculative investments that now have collapsed like a three-legged card table.
Today, in a report called the “Bottom Rung,” Moody’s listed the 283 companies it believed were most at-risk of defaulting on their debt obligations.
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On the top rung of this list of bottom dwellers were Eastman Kodak and casino operator MGM Grand. The Moody’s unit publishing the report rates debt of 2,073 companies, sizing up each one's ability to pay what it owes. The Bottom Rung, which Moody's says it will update monthly, represents roughly the riskiest 15 percent of all companies it tracks. It’s Getting Worse
According to the report, more than 23 percent of all U.S. speculative-grade companies are on the list, compared with 9 percent before the credit crisis. In February, so-called junk-graded companies worldwide defaulted on their bonds at a rate of 5.2 percent. Casino operator and entertainment icon MGM seems to typify the type of investment Moody’s is encouraging investors to eschew. MGM owns 10 Las Vegas casinos, and it has $8.1 billion of bonds outstanding, with $1.28 billion coming due this year. Rochester, N.Y.-based Kodak has $1.4 billion of bonds outstanding, including a $500 million facility maturing in October 2013. Imaging company Kodak was quick to respond, saying that it is financially solid. Further, it is “taking the right actions to ensure that we remain a strong and enduring competitor.” MGM has been as tight-lipped and inscrutable as one of its black jack dealers.
Apparently inclusion on the Moody’s list is not all it’s cracked down to be. The stock prices of both companies surged upward on early trading.
Debt Grade Plummets
Not surprisingly, the Moody’s list includes GM and Chrysler. Also on the list were Unisys, OSI Restaurant Partners (owner of Outback Steakhouses) and Spanish language broadcaster Univision.
When reached for comment about the continuing negative outlook for their company, a spokesman for Univision responded “Como?” The spokesman for OSI offered the caller two-for-one coupons. The debt grade for these companies is so low, Moody’s has had to come up with special designations. Speculative-grade debt is ranked below Baa3 by Moody’s. “Bottom Rung” companies are ranked six steps lower at B3 with a negative outlook or on review for downgrade, or have probability of default ratings of Caa1 or lower. At this point, “junk” status would be the equivalent of AAA rating for most of these companies. Being the bearer of ill tidings is not all bad. After getting pounded over the last several months, Moody’s stock was up about five and a half percent following the release of its grim report.
John Cohn is a senior partner in the Globe West Financial Group, based in West Los Angeles. He may be contacted at www.globewestfinancial.com
