The list of companies that carry the coveted AAA rating on its debt gets smaller each day as the recession cuts cash flows in corporate America, and there is at least one company that carries the rating that may lose it in 2009.
Standard and Poor's (S&P) rates debt issued by corporations that have little or no default risk as AAA, while Moody's uses the similar Aaa rating. Investors use these ratings as a guide to the financial strength of a company, although the last two years has certainly tarnished the reputation of the insurers as many structured products rated AAA began to lose value.
Who Will Lose It?
General Electric (NYSE:GE) carries the AAA rating on its debt, and is often mentioned in the press as the one most likely to lose it. The issue is not only the company's industrial businesses, which are under pressure due to the recession, but its GE Capital subsidiary. Standard and Poor's put the company on a negative credit watch in December 2008. If GE is downgraded, it will raise its borrowing costs. (For more, see The Debt Rating Debate.)
Here to Stay
There are several AAA heavyweights that are under no pressure and are expected to keep its ratings intact. Exxon Mobil (NYSE:XOM) reported more cash than debt at the end of 2008. It would probably take a collapse in oil prices into the single digits for any threat to the AAA rating to appear, and even then Exxon spent more than $40 billion in 2008 on dividends and share buybacks and would trim that back in the future to avoid any cut to its rating.
Microsoft (Nasdaq:MSFT) also received a AAA rating when it filed a shelf registration last Fall. The company had $2 billion in short-term debt at the end of 2008, and cash and short-term investments balance of almost $21 billion.
An argument against paying any attention to these ratings is how accurate and useful they are in the first place. Anti-ratings commentators would point to the original AAA ratings on American International Group (NYSE:AIG), which has received hundreds of billions in government aid, as an example of how shallow the ratings system actually are. Also, the bond insurers MBIA Insurance (NYSE:MBI) and Ambac Insurance (NYSE:ABK) had AAA ratings at the start of the financial crisis despite the intuitively risky nature of the sheer amount of par value bonds that they insured.
While some commentators look at the decline in AAA companies as a reflection of the leveraging of our society, there is something they are missing. There are actually many companies that carry no debt at all in its capital structure, so in essence these companies would carry a quadruple A rating if such a thing existed and if such a thing made sense. Few pundits focus on how many public companies carry no debt relative to historical trends and such an exercise might be useful in interpreting credit trends.
The AAA credit rating club has only a handful of members, and is expected to fall in 2009 due to the recession. There are also serious concerns in the marketplace as to whether the ratings have any utility as they failed to alert investors to various credit disasters in 2008.
For more, see What Is A Corporate Credit Rating.