Capital Markets

Credit Ratings Get Poor Ratings

A study finds that 34 percent of corporate practitioners believe the ratings on their debt are inaccurate.
Joseph McCaffertyDecember 14, 2004

Finance executives have always had a love-hate relationship with credit-rating agencies (CRAs). But according to a recent survey by the Association for Financial Professionals (AFP), it’s more hate than love these days.

The study, released in October, finds that 34 percent of corporate practitioners believe the ratings on their debt are inaccurate, up from 29 percent who thought so when the survey was conducted two years earlier. And 41 percent do not believe the ratings reflect changes in creditworthiness in a timely fashion.

“Confidence in the credit-rating process continues to be low among financial professionals,” says Jim Kaitz, president of the AFP. “Despite the news headlines about financial scandals and hearings in Congress, the situation has not improved.” The CRAs have been criticized for missing corporate scams at companies like Enron and WorldCom.

For their part, the ratings agencies say they have nothing to hide. “We are always looking for ways to make the rating process more transparent,” says Rebecca Hill, vice president of communications at Standard & Poor’s. She says the firm is willing to talk to issuers about its ratings and criteria. “As always, we welcome constructive feedback. It’s not uncommon for issuers to disagree with our ratings opinions.”

But it is not just the downgraded that are skeptical. The study finds that among recently upgraded companies, 36 percent still say the ratings are inaccurate.

Sarbanes-Oxley requires the Securities and Exchange Commission to study CRAs. The commission launched a preliminary report in January 2003, but it has yet to issue any proposals that would change how CRAs are regulated.