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NEWS FLASH
By Nicholas Riccio
Decline and Fall of the Triple-A
Why have so many nonfinancial companies dropped out of S&P's highest-rated group? Will they ever make the tough climb back?
Once upon a time in Corporate America, the club of nonfinancial companies that carried Standard & Poor's highest credit rating of AAA had nearly three dozen members. But times -- and business strategies -- have changed, and the number has dwindled steadily. As of March, 2005, only six still carry that designation:
*Includes U.S. industrial, telecommunications, and utility issuers.
A little more than two decades ago, the club wasn't quite so exclusive. In the 1980-83 period, U.S. nonfinancials boasted 32 AAA credits, which was the highest number ever recorded in this sector. Not surprisingly, the list included some big names such as Coca-Cola, Procter & Gamble, Beatrice, DuPont, Eastman Kodak, Carnation, 3M, Kellogg, Getty Oil, AT&T, Federated Department Stores, Kraft, General Motors, Ford Motor, and IBM.
Fast forward to 2005. All of those names have dropped from the triple-A ranks. How did it happen? The answers are as varied as the companies themselves and include a couple of bankruptcies, a dozen or so major mergers, and the complete disappearance of a few as stand-alone businesses.
*Excludes Bell operating companies. (1) Rating is on debt issued before the entity was acquired and reflects the current rating of the acquirer. (2) AT&T was subsequently downgraded after its initial rating but was raised back to AAA on June 25, 1956. (3) Currently on CreditWatch with positive implications. (4) Currently on CreditWatch with negative implications. (5) Ratings for Kellogg were revised back to AAA on July 15, 1987 and lowered once again on Jan. 10, 1997. (6) Kraft is currently a subsidiary of Altria Group, and the rating is affected by its relationship with the parent company. (7) Rating was raised back to AAA only after the issuer was acquired by another company and reflects debt issued before it was acquired. N.R. = Not rated.
ATTITUDE ADJUSTMENT. Changes in financial policy, which basically translate into a change in corporate risk orientation, have figured importantly in the fall from AAA for some pretty significant companies, including Coca-Cola, Procter & Gamble, DuPont, and Federated Department Stores. For others, like Ford, GM, Eastman Kodak, Bristol-Myers Squibb, Sears, and AT&T, changes in the business environment were the key ingredient in their credit quality decline.
In some instances, a changing global marketplace undermined competitive positions. For others, it was changing technologies. And for a few, failure to maintain a competitive edge in their core businesses. Finally, in a couple of instances, the weakened credit profiles resulted simply from acquisition by another company.
The movement away from AAA ratings was part of a larger trend in the 1980s that included significant changes in the capital markets. Attitudes toward credit risk went from superconservatism to a more functional approach. The "shareholder revolution" of the early 1980s played a major role in reshaping these attitudes. Back then, new business strategies emerged, reflecting a need to add some life to businesses that were maturing.
Copyright 2005, Bloomberg L.P.
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