Faced with the prospect of increased scrutiny by the Securities and Exchange Commission (SEC), Moody’s Investors Service and Standard & Poor’s said yesterday they have expanded the types of information requested from companies.
Both agencies are now asking companies to disclose rating “triggers.” These are clauses in agreements that can adversely affect a company's liquidity if and when the company's rating is downgraded, (e.g., by forcing it to pay off debt or pay a higher interest rate.) “We've called for greater public disclosure of these contingent arrangements,” said Clifford Griep, Standard & Poor's chief credit officer. “Their usage has become so common that there is a need to incorporate triggers in the rating process.”
Moody's spokeswoman Fran Laserson said, “We've communicated with all of our corporate clients and asked them to identify rating triggers in financial agreements, operating agreements, indentures and other legal obligations. Rating triggers can have unintended and highly disruptive consequences for both borrowers and lenders.”
The other leading U.S. rating agency, Fitch Ratings, is also contemplating changes. “Like all market participants, we have become increasingly concerned about the inadequacy of disclosure regarding off-balance [sheet] and other forms of contingent liabilities,” said spokesman Jim Jockle. “We are currently exploring a variety of ways to increase access to this information.”
Earlier this week, SEC Chairman Harvey Pitt told Congress, “We're looking at how rating agencies perform. They have enormous impact on the stock market, and yet they're essentially totally unregulated.” The rating agencies were faulted for failing to alert investors and analysts to factors that contributed to the Enron collapse.