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<blockquote data-quote="moreluck" data-source="post: 281925" data-attributes="member: 1246"><p>A debt rating of AAA is the gold standard — the cleanest bill of financial health — and means a company can borrow money at lower interest rates than those with less pristine credit ratings.</p><p>The falling number is a dramatic sign of how companies' priorities have shifted to place greater value on growth over stability and how economic changes have made the top rating unobtainable or unnecessary.</p><p>"To satisfy bond investors and shareholders, companies manage themselves more aggressively," says Diane Vazza, head of global fixed income for S&P. </p><p>To put the erosion of AAA-rated companies in perspective, consider that 32 non-financial companies carried the distinction from 1980 to 1983, says Nicholas Riccio, credit analyst at S&P. </p><p>Only General Electric and ExxonMobil have remained on the list since 1980, he says. </p><p>There are several reasons for the decline in AAA-rated companies: </p><p>•<strong>More tolerance of risk.</strong> Companies are finding they can satisfy bondholders while pleasing stockholders even if they take on more debt than the AAA rating allows, Riccio says. "People look at (slightly lower) ratings differently (than before)," he says. Coca-Cola and 3M fell off the list because of strategic decisions they made, he says. </p><p>•<strong>Company-specific challenges.</strong> Bad things happen to good companies, making the AAA rating tough to hang on to. Merck, the most recent casualty, is an example. It lost its AAA S&P rating last November largely over concern about potential lawsuits over a recalled drug, Vioxx. </p><p>•<strong>Mergers.</strong> Five former AAA companies, most recently Amoco in 1999, were removed after being bought, Riccio says.</p><p>•<strong>Regulatory concerns.</strong> There's no better example of this than AIG, the nation's largest insurer, now snared in a scandal over its business practices. Its CEO, Hank Greenberg, stepped down this week amid the allegations, leading Fitch to have second thoughts about the company's AAA rating, says Julie Burke, managing director of Fitch's insurance rating group. </p><p>Fitch had already added a "negative outlook" to its rating of AIG, indicating concerns. But it decided on a full downgrade after considering "recent events," Burke says.</p><p>"Is this what you expect from (a) AAA company?" she asks. </p><p>•<strong>New industry dynamics.</strong> The rise of new technology is making it harder for companies to rely on mainstay products, Burke says. That forces companies to constantly invest in themselves to ensure that they are still relevant. Consider Kodak, which lost its AAA S&P rating in 1986, and its struggles to keep up in the digital world. </p><p>Riccio, though, doesn't see the ranks of the AAA companies eroding much more. "The number is so small," he says.</p></blockquote><p></p>
[QUOTE="moreluck, post: 281925, member: 1246"] A debt rating of AAA is the gold standard — the cleanest bill of financial health — and means a company can borrow money at lower interest rates than those with less pristine credit ratings. The falling number is a dramatic sign of how companies' priorities have shifted to place greater value on growth over stability and how economic changes have made the top rating unobtainable or unnecessary. "To satisfy bond investors and shareholders, companies manage themselves more aggressively," says Diane Vazza, head of global fixed income for S&P. To put the erosion of AAA-rated companies in perspective, consider that 32 non-financial companies carried the distinction from 1980 to 1983, says Nicholas Riccio, credit analyst at S&P. Only General Electric and ExxonMobil have remained on the list since 1980, he says. There are several reasons for the decline in AAA-rated companies: •[B]More tolerance of risk.[/B] Companies are finding they can satisfy bondholders while pleasing stockholders even if they take on more debt than the AAA rating allows, Riccio says. "People look at (slightly lower) ratings differently (than before)," he says. Coca-Cola and 3M fell off the list because of strategic decisions they made, he says. •[B]Company-specific challenges.[/B] Bad things happen to good companies, making the AAA rating tough to hang on to. Merck, the most recent casualty, is an example. It lost its AAA S&P rating last November largely over concern about potential lawsuits over a recalled drug, Vioxx. •[B]Mergers.[/B] Five former AAA companies, most recently Amoco in 1999, were removed after being bought, Riccio says. •[B]Regulatory concerns.[/B] There's no better example of this than AIG, the nation's largest insurer, now snared in a scandal over its business practices. Its CEO, Hank Greenberg, stepped down this week amid the allegations, leading Fitch to have second thoughts about the company's AAA rating, says Julie Burke, managing director of Fitch's insurance rating group. Fitch had already added a "negative outlook" to its rating of AIG, indicating concerns. But it decided on a full downgrade after considering "recent events," Burke says. "Is this what you expect from (a) AAA company?" she asks. •[B]New industry dynamics.[/B] The rise of new technology is making it harder for companies to rely on mainstay products, Burke says. That forces companies to constantly invest in themselves to ensure that they are still relevant. Consider Kodak, which lost its AAA S&P rating in 1986, and its struggles to keep up in the digital world. Riccio, though, doesn't see the ranks of the AAA companies eroding much more. "The number is so small," he says. [/QUOTE]
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