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This “Wang Yang Bu Lao thing” on credit rating

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(Update) Big bro started to act now.

(Original) We all know the stock rating game: I mean those “buy”, “hold” and “sell” rating usually issued by sell side (brokeage) analysts. They are mostly not objective, because at the end of the day the dealers want to sell you more stocks, regardless they are good or bad. At the height of this analyst game is Goldman “conviction buy”, my question for them is why there are no “conviction sell”? Presumably, one can use a sell list to short stocks?

Oh well, Michael Lewis, the former Soloman bond salesman, described the analysts in his “Liar’ Poker” very well. So I won’t keep beat on them. My focus on this little article is on the credit rating (bond rating) game. We all know the credit rating agencies (agencies may have mislead some to think they are independent organization, they are really for-profit companies) have been under attack for the debale of housing/mortgage markets because they had been slept in the same bed with the issuers of MBS (mortgage backed securities).

One interesing phenomena I saw recently is now that the horses are all out of barn, the credit rating agencies (excuse me, companies) decided to raise the fence in the barn. In Chinese we call it “Wang Yang Bu Lao” 亡羊补牢 (baidu). It’s better than doing nothing, but it also put more stress on the horses who want to get back to the barn (higher fence). In the case of companies who need to refinance, the cost of raising new debt will be higher. For instance, Ingersoll Rand (NYSE: IR), had to pay 9.5 to 9.625 coupon (interest rate) for $600 5 year notes, compared to same term treasury notes at 1.75% (source: Bond Expert seekingalpha). Quote:

“Ingersoll Rand (IR) is BBB+ and lowered guidance recently. They are on watch for another downgrade.

Against that background they chose to issue 5 year notes today. They are talking a coupon of 9 1/2 to 9 5/8 . That is pretty wide to the 5 year Treasury at about 1.75 percent.”

What does this mean for investors?
As I was reading a few weeks back, there are only a few AAA US companies: ADP, Exxon Mobile, Johnson & Johnson, Microsoft and Pfizer. Recently GE and Berkshire lost their AAA status. I noticed yesterday US bank debt also get downgraded. Basically it will raise the borrowing cost for the companies (e.g. Berkshire had to pay 282 basis points over same maturity treasuries for its $750 m notes).

Jund bonds (high yield): be careful. I remember shortly before WaMu’s seizure by FDIC, its bond was downgraded to “C” or “D” status by rating agencies. So a lesson learned for me: when a bank’s debt becomes highly speculative, its common stock is probably worthless.

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