Recent High-Profile “Losing the ‘AAA’ Ratings”
Many companies through time have fallen from grace in the “AAA” and “Aaa” ratings. General Electric Co. (NYSE: GE), Berkshire Hathaway Inc. (NYSE: BRK-A, NYSE: BRK-B), and Merck & Co. (NYSE: MRK) all lost their Triple-A ratings.
GE lost its S&P “AAA” rating at the bottom of the market in March 2009 after about three months worth of debt downgrade telegraphing. The financial leverage from its GE Capital and the risks associated with being tied to business and the consumer were the reasons.
Berkshire Hathaway was first downgraded by Moody’s in April 2009 based upon falling equity values, capital cushion reductions, and all the other woes during the Great Recession. Fitch was actually the first to cut Berkshire. Merck lost its Triple-A rating from both Moody’s and S&P after it had to withdraw Vioxx as the litigation risks mounted from endless lawsuits.
Mortgages & Municipal Bonds, Where “AAA” Dares to Go…
There is another issue with the so-called Triple-A rating that has probably been highlighted recently by the likes of Meredith Whitney. Municipalities and pools of mortgage securities often carry a Triple-A rating due to default insurance or due to assurance of a larger entity. What happens if the insurance company goes bust? And now how safe are Fannie Mae and Freddie Mac as “assurance” entities? There is not enough reinsurance risk out there to cover all the U.S. municipalities and mortgage pools in the event of widespread default. Not even close. Since 2008, you have seen wave after wave of credit rating downgrades in mortgage-backed securities, CDOs, and even in municipalities. When mortgage and bond insurers like Ambac Financial, Assured Guaranty and others reach a point that they cannot issue new coverage, you know what can happen to the underlying credit ratings of insured bonds.
Considering any pool of mortgages and any municipal bond as a “AAA” and “Aaa” rating today may seem counter-intuitive on a standalone basis without outside guaranty by insurers or government agencies. Still, there are many. Too many to count. Many of these ratings have already changed and many will change through time.
THE FUTURE OF “AAA”
Having a Triple-A rating in the future is going to be far more difficult than in the past. Microsoft now has a 20-year model and then some. Apple Inc. (NASDAQ: AAPL) sits on far more cash but it really has no long-term debt obligations that have been sold off to corporate and institutional investors. It is very likely that Apple would carry a Triple-A rating, but it is currently not rated in the same manner as other companies. Another company that is in the same boat… Google Inc. (NASDAQ: GOOG).
Future mortgage and municipal ratings will likely have higher standards. Much depends upon the economy. Some also depends upon regulation and politics. The ratings agencies missed the boat so badly ahead of even during the Great Recession that trusting “AAA” does not mean what it used to. Meredith Whitney has even applied for a new ratings agency status, and with her history it is easy to assume that she would not be willing to hand out any “AAA” ratings too easily.
Some of the companies which have lost their Triple-A ratings may be able to recovering them down the road. Getting those ratings back will be no easy task. Ditto for mortgage and municipal issuers. As far as the future number of sovereign nations with “AAA” ratings, logic probably dictates a fewer number as well.
The “AAA” debate will continue ahead. Stay tuned…
JON C. OGG
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