According to the ratings agencies AAA is AAA. But let’s return to the real world for a sec. Even before the mortgage meltdown, those supposed AAA Mortgageback securities were yielding way above comparable AAA corporates and sovereign bonds. The ratings agencies called them AAA but no one with half a brain believed that.
From a Moody’s report today (discussing European corporates). It goes into a lot of detail about how sovereign distress impacts corporates, and I recommend it if you can pull this report from moodys.com.
“European Corporates: Improved Credit Outlook, But Sovereign Weakness Continues to Pose Risks””
“Only the strongest corporate ratings will be able to withstand a fall in the sovereign’s rating, and only where the corporates’ balance sheet and liquidity profile are extremely strong. We have commented extensively on how utilities’ ratings would be affected.
The linkage between corporate and sovereign ratings might likely loosen in some cases when sovereign ratings migrate to the very low end of the rating scale. This is more likely if the sovereign debt restructuring process is considered likely to be orderly and not be accompanied by sovereign interference with corporates through tax or regulatory changes or debt moratorium provisions. . For other corporates with exposure to only one country, ratings are unlikely to remain more than two notches above that of the sovereign if the sovereign rating comes down. A rating of three notches above the sovereign would imply a probability of default significantly lower than that of the sovereign (in the order of 2x to 3x less than the sovereign). This might be achievable for corporates which are highly geographically diversified outside of the affected sovereign (in terms of revenues as well as operations), as is the case for Coca-Cola Hellenic (A3, stable) in Greece or CRH (Baa1 negative) in Ireland. But such instances are rare.
“The linkage between corporate and sovereign ratings might likely loosen in some cases when sovereign ratings migrate to the very low end of the rating scale. This is more likely if the sovereign debt restructuring process is considered likely to be orderly and not be accompanied by sovereign interference with corporates through tax or regulatory changes or debt moratorium provisions.”
According to the ratings agencies AAA is AAA. But let’s return to the real world for a sec. Even before the mortgage meltdown, those supposed AAA Mortgageback securities were yielding way above comparable AAA corporates and sovereign bonds. The ratings agencies called them AAA but no one with half a brain believed that.
From a Moody’s report today (discussing European corporates). It goes into a lot of detail about how sovereign distress impacts corporates, and I recommend it if you can pull this report from moodys.com.
“European Corporates: Improved Credit Outlook, But Sovereign Weakness Continues to Pose Risks””
“Only the strongest corporate ratings will be able to withstand a fall in the sovereign’s rating, and only where the corporates’ balance sheet and liquidity profile are extremely strong. We have commented extensively on how utilities’ ratings would be affected.
The linkage between corporate and sovereign ratings might likely loosen in some cases when sovereign ratings migrate to the very low end of the rating scale. This is more likely if the sovereign debt restructuring process is considered likely to be orderly and not be accompanied by sovereign interference with corporates through tax or regulatory changes or debt moratorium provisions. . For other corporates with exposure to only one country, ratings are unlikely to remain more than two notches above that of the sovereign if the sovereign rating comes down. A rating of three notches above the sovereign would imply a probability of default significantly lower than that of the sovereign (in the order of 2x to 3x less than the sovereign). This might be achievable for corporates which are highly geographically diversified outside of the affected sovereign (in terms of revenues as well as operations), as is the case for Coca-Cola Hellenic (A3, stable) in Greece or CRH (Baa1 negative) in Ireland. But such instances are rare.
“The linkage between corporate and sovereign ratings might likely loosen in some cases when sovereign ratings migrate to the very low end of the rating scale. This is more likely if the sovereign debt restructuring process is considered likely to be orderly and not be accompanied by sovereign interference with corporates through tax or regulatory changes or debt moratorium provisions.”
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