No, really. Corporate ratings can help investors.
When mega-miner BHP Billiton (LSE: BLT) launched its $40bn hostile bid for fertiliser giant PotashCorp, it immediately got the attention of the credit rating agencies as well as that of the equities markets.
Standard & Poor's jumped in to warn that the mining giant's A+ rating could be under threat because of the higher debt it would load up. To use S&Ps own phrase, its "financial flexibility" would be strained through the $45bn loan it has reportedly lined up with a consortium of banks.
As a result, the rating would probably have to drop a notch to A1. Soon afterwards, Moody's jumped in to threaten a downgrade to A2 if the takeover went ahead.
None of this means that BHP Billiton is turning itself into a hedgie. It's a conservatively funded firm and would remain so after any re-rating. Also chairman Jac Nasser, who used to run Ford, would have been well aware that the agencies would have to redo their sums after the announcement of the bid.
It's not the first time BHP has been put on notice either. The last time it went on negative outlook was in 2008 at the time of a proposed offer for the other mining giant Rio Tinto (LSE: RIO).
An investing shortcut
After all, this is what the agencies are meant to do and big-borrowing or bond-issuing companies prize high ratings, not just because they mean cheaper debt but because of what they say about their general health.
Thus time-challenged investors can take credit ratings as a useful short-cut. Never mind the fine print, just go straight to the credit rating. And because public companies in the debt markets have to publish the ratings, it couldn't be much easier.
Ratings also have the merit of simplicity. They run from top-rated A (AAA for the cream of the sovereign borrowers) to junk-rated D, with minor variations along the way denoted by a plus or minus sign.
Meantime it's food for thought that BHP Billiton's A+, at least for now, is a lot better than the Greek government's BB+, which rates it as a speculative bond.
Are ratings worth anything these days?
However, it's not exactly a revelation to say that the agencies have taken a beating lately over their role in the financial crisis, more specifically for the gay abandon with which they bestowed AAA ratings on the infamous asset-backed securities that triggered the crisis.
In fact on Tuesday, the US watchdog, the Securities and Exchange Commission, accused Moody's of failing to correct a blunder it made in 2007 in assessing an asset-backed security called a CPDO "because of the negative effect on Moody's reputation". Also, law suits are piling up on the agencies such as one from giant pension fund Calpers claiming "negligent misrepresentation" for ratings of bonds that were "wildly inaccurate and unreasonably high." To boot, Nobel prize-winning economist Paul Krugman sees the agencies as part of a "deeply corrupt system".
As a result, the agencies' wings have been -- or are being -- clipped. The SEC has made registration with the authority compulsory while the agencies will have to disclose how much they trouser in fees from the rated firm. And just in case, a flying squad of SEC examiners has been mandated to descend on them out of the blue.
The European experience
It seems they can't do anything right. When the agencies started doing rigorous assessments of sovereign debt in Europe, they became the villains all over again.
Fitch got blamed for down-rating Spain's sovereign debt in June and triggering another panic soon after the Greek one. There was more mayhem when the agencies downgraded some southern European countries for adopting the very austerity measures that were supposed to tidy up their public finances. "Ratings often work like gasoline when poured on a fire", said a German economist.
Since then, there have been calls for ratings moratoriums as well as for a European agency that would presumably treat EU nations more kindly than Fitch, S&P and Moody's, which are all US-based.
Back to basics
There's no doubt though that the crisis helped get the agencies back to basics. They may have made a complete abortion of rating asset-backed securities, but they've generally done a good job on listed companies such as BHP Billiton.
A credit rating says an awful lot about a company: cost of debt, ability to repay it, robustness of profits, reliability of revenues, quality of management and all the rest. So all up, the credit rating's not a bad proxy for a lazy investor.
More from Selwyn Parker:
